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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
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Liabilities: investigating form IHT419: how FA86/S103 applies when there is ‘consideration given by any person whose resources at any time included property derived from the deceased’?

FA86/S103 (1)(b) extends the legislation to cover situations where the consideration for the debt is not derived from the deceased. It forbids or restricts the deduction of liabilities where the consideration was given by any person:

  • who was at any time entitled to any property derived from the deceased (IHTM28367),

or

  • whose resources at any time included any property derived from the deceased.

The test applies to situations where the loan to the deceased is not made out of property derived from the deceased as such but was enabled or facilitated by a disposition by the deceased. In other words it will apply where X makes a gift to Y which enables Y to make a loan out of property which Y has owned all along.

Example

On 19 March 1987 Alan gives his brother Billy a parcel of land worth £25,000.

On 27 April 1987 Alan borrows £25,000 from Billy.

On 7 April 1994 Alan dies, at which time Billy retains the land which is non-income producing.

The PET was made more than seven years before the death so that no claim arises on the death. As the consideration for the debt is not derived from the deceased FA86/S103 (1)(a) would not apply. But this arrangement is caught by FA86/S103 (1)(b) and the liability is not an allowable deduction for Inheritance Tax purposes.

The words ‘at any time’ means that means that the legislation applies to property derived from the deceased before, as well as on or after, 18 March 1986.

In some circumstances, where an arrangement is caught by this provision part of the debt (IHTM28369) may be allowed.