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HMRC internal manual

Inheritance Tax Manual

Liabilities: restricted deductions: borrowed money used to fund a foreign currency bank account

Where a person’s estate includes a qualifying foreign currency bank account (IHTM04380) which meets the conditions of IHTA84/S157 and estate also includes a liability where the borrowed money was used either directly or indirectly to finance the balance in the account, IHTA84/S162AA provides that the liability may only be allowed as a deduction against the estate to the extent that it exceeds the balance on the account, IHTA84/S162AA(3).

However, that excess may only be deducted if it has not been brought about by one or more of the reasons listed in IHTA84/S162AA(4), which are that:

  • the excess arises from arrangements, the main purpose, or one of the main purposes of which was to bring about a tax advantage, or
  • the amount of the liability has been increased because interest has been added to the amount due or the amount to be repaid has increased in some other way.

The meaning of ‘arrangements’ is defined in IHTA84/S162AA(5) and includes any scheme, transaction, or series of transactions, agreement or understanding whether or not legally enforceable, and any associated operations (IHTM14822).

In view of the definition of ‘tax’ in IHTA84/S272, a tax advantage here means an Inheritance Tax advantage. This is defined in IHTA84/S162AA(5) as meaning the avoidance or reduction of a charge to tax or the avoidance of a determination of tax.


Roberto borrows £1m which he charges on his UK property worth £1.5m. He puts the borrowed money into a US dollar account with a UK bank. On his death, the balance in the account has grown to £1.2m. The US dollar account is left out of account on Roberto’s death, but the liability of £1m is disallowed by IHTA84/S162AA because it was used directly to fund the balance on the account. If the balance on the account was less than £1m on Roberto’s death, the excess of the liability over the balance could be allowed as a deduction, provided the excess does not result from arrangements designed to secure a tax advantage.