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New inheritance tax guidance on collateral for UK resi-property loans

Professional bodies CIOT and STEP have confirmed that after further discussion on the inheritance tax treatment of loans to finance UK residential property, HMRC are now "inclined to agree" that unsecured guarantees and generic security for relevant loans may be outside the scope of the tax, "depending on the facts of a particular case".

The rules which brought indirect holdings of UK homes of foreign domiciliaries into the inheritance tax net with effect from April 2017 also catch overseas loans made by non-doms to finance UK residential property interests as well as assets "held or otherwise made available as security, collateral or guarantee" for relevant loans. 

This caused concern that inheritance tax might be charged where assets were simply available to the lender by way of set-off under the bank's standard terms and conditions, rather than formally pledged or charged as security for a loan.

In answers to a series of questions on areas of uncertainty on the legislation, HMRC had previously disagreed that generic security would not be caught. They have now revised their view, confirming that "the legislation was not intended to interfere with normal banking arrangements" and now agree that if property given as security or collateral is too remote or has no connection with the relevant loan, it will not be subject to inheritance tax.  HMRC caveat that position slightly by saying in some circumstances collateral available under a general pledge may be within the tax net "depending on the facts of a particular case."  It is not clear what sort of banking terms would cause an issue, possibly a reference to an "encumbrance" over other assets could be problematic, but it seems clear that HMRC's view has softened and they stress that only collateral up to the value of the loan would be caught.

HMRC have, however, confirmed that if a guarantee is not connected to any particular property so that the lender only has general recourse to the guarantor for any failure of the primary debtor to repay a loan, then the guarantor's assets should remain excluded property for inheritance tax purposes.

3 March 2020

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