IHT Anti-Avoidance: An Allowable Loan? Part 1

By | 17 March 2017

No-one likes to think about death – especially their own! However, in practice most inheritance tax (IHT) planning is seemingly aimed at reducing potential IHT on death. Not surprisingly, there are anti-avoidance rules aimed at blocking some of this IHT planning. One such anti-avoidance provision applies to liabilities on death.

Liabilities are normally taken into account in valuing a person’s estate (i.e. whether on death or on a lifetime transfer) if imposed by law, or to the extent of being incurred for consideration in money or money’s worth (IHTA 1984, s 5(3), (5)). For example, the acquisition of an individual’s investment property may have been financed by a mortgage from a building society. In determining the value of the person’s estate, the outstanding mortgage will normally be deductible for IHT purposes.

Loan between family members

On the face of it, an IHT deduction for a liability gives rise to potential planning possibilities. For example, an elderly widowed mother could borrow cash from her adult son (who is financially sound) shortly before her death. The loan is at a commercial rate of interest (and is secured on mother’s assets and repayable on demand). Instead of making a lifetime gift of the money (which would be liable to IHT in mother’s estate on death, subject to any available reliefs, exemptions and nil rate band) the son intends lending the money, and writing off the loan after his mother’s death.

Mother and son hope that the loan will be an allowable deduction from mother’s estate on death, but that writing off of the loan will increase the amount left to beneficiaries (i.e. other family members) after her death.


However, IHT planning of this kind is potentially blocked by anti-avoidance rules regarding the discharge of liabilities after death (s 175A). These provisions are generally designed to block schemes and arrangements aimed at exploiting the IHT rules on liabilities to reduce the value of an estate. Such arrangements have previously involved obtaining a deduction for a liability, and either not repaying the liability after death, or acquiring an asset which is not chargeable to IHT.

The rules broadly provide that in determining the value of a person’s death estate, a deduction for a liability is only allowed to the extent that it is repaid to the creditor out of the deceased’s estate (or from ‘excluded property’ owned by the deceased immediately before death) and there are no other IHT provisions that prevent it from being taken into account.

Is it commercial?

There is a potential exception to this restriction, where it is shown that there is a real commercial reason for not repaying the liability, securing a tax advantage is not a main purpose of leaving the liability outstanding, and it is not otherwise prevented from being taken into account (s 175A(2)).

However, those conditions would not appear to be satisfied in the above example of the loan between son and elderly mother.

So when would the ‘commercial’ exception apply? HM Revenue and Customs (HMRC) guidance (at IHTM28029) cites an example of a business being taken over by the deceased’s beneficiaries, where its bank is prepared to allow any lending and overdraft facilities to continue.

Even if it is intended that a loan will be repaid following the borrower’s death, HMRC may wish to check that the repayment has actually been made out of the deceased’s estate etc., particularly if the loan is between family members or other connected parties (e.g. family trusts or owner-managed companies).

Practical point

Care is needed. Aside from the above anti-avoidance rule in s 175A, as indicated above the liability must not be prevented by other provisions of the IHT legislation from being taken into account. Thus in the above example if the son’s loan to his mother had been interest-free, a deduction for the liability would potentially be denied on mother’s death, on the basis that the loan was not incurred for consideration in money or money’s worth (as required by s 5(5)).

The above article was first published by Tax Insider (July 2016) (www.taxinsider.co.uk).