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Relevant Loans

The rules which brought indirect holdings of UK homes of foreign domiciliaries into the inheritance tax net from April 2017 also catch overseas loans made by such individuals 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 available by way of general set-off under a bank's standard terms and conditions, rather than formally pledged or charged as security for a loan.

HMRC have now confirmed that "the legislation was not intended to interfere with normal banking arrangements". They 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 their position by saying that 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 also confirm that if a guarantee is not connected to any particular property, so that the lender only has general recourse to the guarantor for a failure to repay a loan, then the guarantor's assets should remain excluded property for inheritance tax purposes.

26 March 2020

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