Tax Bulletin March 2020

IHT: UK Residential Property

The professional bodies have published further guidance on the 2017 rules for the IHT treatment of UK residential property under Schedule A1 IHTA 1984 following their discussions with HMRC. (This is version 3 published on 27th February 2020).

The particular issues referred to in this further guidance relate to HMRC’s views on collateral and guarantees for relevant loans. A relevant loan (which is, mainly, one which is used to acquire UK residential property) is not excluded property for IHT purposes – and any assets supporting that loan by way of security, collateral or guarantee are also denied excluded property treatment for those who are not UK domiciled.

HMRC confirm that they “would be inclined to agree “that where a guarantee for a relevant loan is completely unsecured and not connected to any particular property of the guarantor, the guarantor’s assets remain excluded property. Hardly a ringing endorsement but we should still be grateful.

The second point arising from this updated guidance relates to the position where the collateral exceeds the amount of the loan. Part of the assets supporting the collateral will be chargeable up to the amount of the loan and part will be excluded. HMRC acknowledge that the amount brought into charge to IHT under Schedule A1 is the value of the property plus the value of the collateral (yes – that is a double charge) but they accept (well, nearly) that the amount of the loan should be set against the UK estate rather than deducted from the excluded part of the collateral.

It is difficult to feel good about this. I have a house worth £1m and have borrowed £1m to buy it so why should I be grateful that I am not being taxed on £2m (or even £1m) just because of the way it is financed. It must be the tax equivalent of Stockholm Syndrome to feel that I should say thank you.

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