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HMRC internal manual

Inheritance Tax Manual

Liabilities: investigating form IHT419: how FA86/S103 applies when the consideration is ‘property derived from the deceased’?

The legislation disallows a debt to the extent that the consideration for it consisted of property derived from the deceased, FA86/S103 (1)(a). ‘Property derived from the deceased’ (IHTM28367) is defined in FA86/S103 (3).

This provision would defeat the following arrangement:

Example

  • On 19 March 1987 Adam gives his brother Brian £25,000.
  • On 25 April 1987 Adam borrows back £25,000 from Brian.
  • On 7 April 1994 Adam dies.

Without the legislation Adam’s estate includes the original £25,000. But if the money was still owed when Adam died the debt might be claimed as a deduction against his estate. And the PET in 1987 is exempt as more than 7 years have elapsed.

The legislation disallows the deduction for Inheritance Tax purposes. The debt is treated as a specific gift so grossing (IHTM26000) may be required. If the deceased had repaid some of the loan any repayments made within 7 years of death would be treated as PETs (IHTM04057).