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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
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Liabilities: investigating form IHT419: calculating the allowable deduction for a guarantee debt

As long as the debt was for consideration (IHTM28353) you should allow a deduction in the deceased’s estate for the part of the outstanding loan that cannot be met by the borrower. The basic scenarios are as follows

Borrower has no resources

If the borrower has no financial resources the whole of the outstanding liability will be deductible but the guarantee may be a lifetime transfer (IHTM28356).

Borrower has resources

If the borrower has enough financial resources to repay the loan in full the debt is not allowable. There is no lifetime transfer.

Borrower can repay part of the outstanding loan

If the borrower can only repay part of the loan the deduction is limited to that part of the loan that cannot be met by the borrower and which will have to be met by the deceased. You will need to negotiate the size of the deduction with the taxpayers. The guarantee may be a lifetime transfer (IHTM28356).

The deduction allowed will not necessarily be the same as the amount, if any, ultimately paid out of the estate. This is because the liability is considered as at the date of death for Inheritance Tax purposes.