UK: New Rules On Loans For Inheritance Tax Purposes

Last Updated: 4 June 2013
Article by Emma Loveday

The Budget Statement on 20 March 2013 included an unexpected announcement concerning the deductibility of loans for inheritance tax ("IHT") purposes. At present, these rules are due to come into force when Finance Bill 2013 receives Royal Assent (expected in July 2013) and, subject to conditions, they will apply to all existing loans.

Existing treatment of loans for IHT purposes

Under the current rules, IHT is charged on the net value of a deceased person's estate after taking into account any liabilities outstanding at the date of death. IHT is also relevant for trusts that are within the "relevant property regime" and is charged at every ten year anniversary of the trust and when property is distributed from it, calculated by reference to the net value of the trust fund after taking into account any liabilities outstanding at the date of the chargeable event.

Under proposed new rules, the deductibility of certain categories of liabilities will be prevented or restricted for all deaths, chargeable transfers and chargeable events after the date the Finance Bill2013 receives Royal Assent.

Proposed new rules

The proposed new rules will affect the following categories of liabilities:-

  1. loans in the name of an individual that are not repaid on or shortly after death out of estate funds;
  2. loans that have been used to fund the acquisition, maintenance or enhancement of "excluded property" (broadly, property owned by a non-UK domiciled individual or a trust with a non-UK domiciled settlor which is situated outside the UK and thus not chargeable to IHT); and
  3. loans that have been used to finance the acquisition, maintenance or enhancement of assets for which relief from IHT is given, such as Business Property Relief, Agricultural Property Relief or Woodlands Relief.

Loans in the first category will not be deductible for IHT unless there is a commercial reason for leaving the loan outstanding, the loan is not being used predominantly to gain a tax advantage and there is nothing else in the IHT legislation which would prevent the debt from being used to reduce the value of the estate for IHT.

Loans in the second category will notbe fully deductible for IHT unless the excluded property has been disposed of or where the loan is greater than the value of the excluded property, and subject to certain conditions relating to the disposal (and in some cases the motive behind the disposal).

Loans in the third category will be matched to the value of the assets that qualify for relief, and relief will be restricted to the net value of the asset. If the amount of the loan exceeds the value of the asset, the surplus will be deductible against the estate but subject to conditions.

Impact of the proposals

The proposed rules on the deductibility of loans are part of the Government's anti-avoidance strategy and are designed to clamp down on arrangements that are intended to take advantage of the current treatment of liabilities; however, as drafted, the new rules will also catch many innocent situations and ordinary family or commercial arrangements.

Examples of situations that may be affected are:-

  • a loan made by a child to their elderly parent (perhaps to fund care fees) which the child may not intend to call back in again after the parent's death;
  • where the borrower is non-UK domiciled, a loan against a UK property which is invested in assets offshore (this may affect property owners who have "de-enveloped" their UK home as a result of the new tax charges on high value UK residential property); 
  • where the borrower is a business owner, a home loan which is used to purchase assets for the business that qualify for BPR;and
  • where a trust or individual has taken out a loan to mitigate IHT liabilities and invested the proceeds in relievable assets.

However, ordinary commercial loans, such as a mortgage used to purchase UK property, should not be caught by the new rules as drafted.


The proposed new rules concerning the deductibility of loans were announced without consultation and this has provoked criticism from practitioners. However, a significant turnaround from the Government is not expected. We must now await the final form of the legislation, once Finance Bill 2013 receives Royal Assent, so as to know the precise impact of the new rules on individual situations. In the meantime, affected individuals should consider whether any of their loans could be caught, the effect of keeping that loan in place under the legislation as drafted, and their options in terms of restructuring.

Aside from concern that the Government is reversing a long-standing IHT principle, anger has centred on the way in which the proposals were announced, as there was no prior warning or mention in the Autumn Statement, and this may set a worrying precedent for future Budgets, particularly as it follows close on from HMRC's unexpected and controversial change of view on specialty debts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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