IHT Loan Back UK 2026: s162 IHTA Debt Deduction, s162A Artificial Debt Rule, Loan from NRB Will Trust to Survivor, and HMRC Scrutiny
A loan from a nil-rate band will trust to the surviving spouse creates a deductible liability under s162 IHTA, reducing the taxable estate by up to £325k and saving up to £130k IHT. Since Finance Act 2013, s162A denies the deduction if the loan funds are used to buy BPR-qualifying or APR-qualifying assets. Equity release follows the same deduction rules without the BPR double-dip risk.
Loan Back: Valid Under s162 IHTA, But NEVER Use Loan Funds to Buy BPR Assets (s162A Denies the Deduction)
IHT loan back: NRB will trust lends £325k to surviving spouse → deductible liability on survivor's death (s162 IHTA) → saves up to £130k IHT. s162A IHTA (FA 2013): deduction DENIED if loan funds used to acquire BPR/APR-qualifying assets (AIM shares, EIS, farmland, business shares), double-dip prevented. Safe uses: living expenses, normal investments, mortgage repayment, gifts. HMRC accepts genuine NRB trust loan backs (IHTM28382), must be: written agreement; separate trust account; real assets transferred; genuine repayment on survivor's death. Equity release (lifetime mortgage): also deductible under s162, reduces estate by outstanding mortgage; s162A does not normally apply (home is taxable, not exempt). Keep loan back funds in a SEPARATE ACCOUNT, never commingle with personal funds.
| Aspect | Rule / Principle | Example / Scenario | Planning Guidance |
|---|---|---|---|
| How IHT loan back works: s162 IHTA debt deduction | S162 IHTA 1984, DEDUCTIBLE LIABILITIES: when calculating an estate for IHT, legally enforceable debts owed by the deceased at the date of death are deducted from the gross estate value. This is an established principle: a person's NET estate (not gross) is subject to IHT. COMMON TYPES OF DEDUCTIBLE LIABILITIES: (a) mortgages on property; (b) bank loans; (c) trade debts; (d) loans from trusts. A LOAN FROM A WILL TRUST TO THE SURVIVING SPOUSE: (i) the NRB will trust (created by the first spouse's will) receives £325k; (ii) the trustees formally lend £325k to the surviving spouse (documented in a written loan agreement); (iii) the surviving spouse has use of the funds during their lifetime; (iv) the loan is repayable on demand or on the survivor's death; (v) on the survivor's death: the outstanding loan balance is a deductible liability, reducing the estate by £325k. IHT SAVING: 40% × £325k = £130k. WHY IT WORKS: the loan is a genuine legal obligation, the trust (a separate legal entity under the trustees) has a contractual right to repayment. On the survivor's death, the estate's personal representatives are legally obliged to repay the trust from the estate assets. The deduction is legitimate under s162 IHTA. THE TRUST RECEIVES THE REPAYMENT: when the loan is repaid from the survivor's estate, the trust assets increase by £325k (the repayment). These trust assets are then distributed to the beneficiaries (typically the children) as specified in the trust deed. The trust distribution to the children may attract IHT exit charges if the trust is a relevant property trust, but these exit charges are typically modest compared to the IHT saved on the survivor's estate. HMRC ACCEPTANCE: HMRC has accepted NRB will trust loan backs as valid planning in their Inheritance Tax Manual (IHTM28382). HMRC does not challenge loan backs where: (a) the trust is genuine (real assets settled; real trustees; real trust deed); (b) the loan is documented (written agreement before the funds are transferred); (c) the loan is used for legitimate non-exempt purposes. CONDITIONS FOR VALIDITY: (a) THE TRUST MUST BE GENUINE: assets must be physically transferred to the trust bank account before any loan back. Not a 'book entry' arrangement. (b) THE LOAN MUST BE GENUINE: written loan agreement specifying amount, interest rate (0% is acceptable), repayment terms. (c) SEPARATE TRUST BANK ACCOUNT: the trust holds its assets separately from the surviving spouse's personal assets. (d) THE LOAN IS REPAID (or at least repayable): on the survivor's death, the personal representatives must actually repay the trust from the estate, not just treat the deduction as a formality without real repayment. | LOAN BACK, STEP-BY-STEP WORKED EXAMPLE: Henry (age 70) dies. His will creates a NRB discretionary trust of £325k for his wife Alice (age 66) and their children. Henry's estate: £325k to NRB trust + £400k to Alice outright (spouse exempt). STEP 1: trustees of the NRB trust open a trust bank account. Henry's executors pay £325k into the trust account (from Henry's investments). STEP 2: trustees agree to lend £325k to Alice. Loan agreement signed: Alice borrows £325k from the trust; interest-free; repayable on demand or on Alice's death. STEP 3: trust transfers £325k from trust bank account to Alice's personal bank account. Alice now has: £400k (direct from Henry's estate) + £325k (loan from trust) = £725k in her hands. Outstanding loan: £325k owed to the trust. ALICE'S DEATH (5yr later): Alice's estate: own assets grown to £500k. Loan outstanding to NRB trust: £325k (still outstanding, not repaid). ESTATE FOR IHT: £500k − £325k (loan) = £175k net. Alice's NRB: £325k (Henry's NRB was used by the trust: no TNRB). Alice's RNRB: £175k (if home passes to children). Threshold: £325k + £175k = £500k. IHT = 40% × (£175k − £500k) = £0 IHT (estate net of loan = £175k, well below threshold). THE TRUST RECEIVES £325k LOAN REPAYMENT: the trust now has £325k in cash (repaid by Alice's estate). This is distributed to the children. Exit charge on distribution from the NRB trust (which is a relevant property trust): approximately 6% × time-weighted calculation, very modest. TOTAL IHT OUTCOME: Henry's death: £0. Alice's death: £0. Total IHT on combined estate of £725k: £0 (from an estate that otherwise would have borne IHT if not for the loan back structure). | STRUCTURING THE LOAN BACK CORRECTLY: (1) ACT PROMPTLY: create the trust and execute the loan agreement as soon as possible after the first spouse's death. A loan agreement executed years later (after the survivor has spent the funds) may be challenged by HMRC as not a genuine contemporaneous loan. (2) DOCUMENT EVERYTHING: loan agreement (signed; dated; specifying amount, interest, repayment); trust bank account statements showing receipt of trust assets then loan to survivor; annual trust accounts showing loan balance. (3) PROFESSIONAL TRUSTEE INVOLVEMENT: having a professional trustee (solicitor, accountant) as co-trustee alongside the surviving spouse adds credibility. The professional trustee's involvement demonstrates the trust is a genuine independent entity. (4) INTEREST-FREE IS FINE: HMRC accepts interest-free loans from trusts to beneficiaries in this context (IHTM28382). An interest rate of 0% is common. If interest were charged: the interest income would be taxable trust income (at 45%). Interest-free avoids this complexity. (5) REVIEW THE LOAN PERIODICALLY: if the surviving spouse's financial circumstances change (e.g., they want to make a large gift to children), consider repaying part of the loan first (reducing the deductible liability but simplifying the estate). Or: the survivor makes gifts from their own assets (not the loan funds), preserving the loan deduction. (6) CONSIDER CGT: if the NRB trust holds investments (rather than cash), and those investments gain in value, the trust will have CGT implications on disposal. Plan trust investments with the trustees' CGT position in mind. |
| s162A IHTA: the artificial debt rule and when the loan back deduction is denied | S162A IHTA 1984 (Finance Act 2013, s176): THE ARTIFICIAL DEBT RESTRICTION: s162A denies the deduction for a liability where: (a) THE LIABILITY WAS INCURRED TO FINANCE THE ACQUISITION, MAINTENANCE OR ENHANCEMENT OF EXCLUDED PROPERTY OR EXEMPT PROPERTY: 'excluded property' means property held by a non-domiciliary (foreign situs assets, s48 IHTA). 'Exempt property' means property for which there is an IHT exemption or relief, including: BPR-qualifying assets (100% or 50% BPR), APR-qualifying assets, assets exempt as gifts (e.g., assets exempt under the normal expenditure from income exemption that have been separated out). OR (b) THE LIABILITY IS OTHERWISE THE PRODUCT OF ARRANGEMENTS THE MAIN PURPOSE OF WHICH IS THE AVOIDANCE OF IHT: this is the broader catch-all, but interpreted narrowly in HMRC guidance (NRB trust loan backs are NOT caught by this limb if they are genuine trusts). THE MOST COMMON s162A TRAP, BPR/AIM SHARES: if the surviving spouse uses the loan back funds (say £325k) to purchase AIM shares that qualify for 100% BPR: on the survivor's death: (a) AIM shares: 100% BPR exempt (within FA 2026 £1m cap). (b) Loan: £325k deductible (s162 IHTA). DOUBLE BENEFIT, DENIED BY s162A: s162A(1)(b) denies the loan deduction to the extent the liability financed the acquisition of exempt property (the AIM shares). The £325k loan deduction is DENIED. The AIM shares still receive BPR, but the loan is no longer deductible. NET POSITION: the estate taxed on own assets + AIM shares (BPR exempt) − £0 loan = higher IHT than expected. HMRC TRACKING: HMRC has specifically warned about 'IHT double dip' arrangements where loan deductions are combined with BPR/APR exemptions. HMRC issues these schemes with reference to their 'avoidance priority' flags. CHECK IF TAINTED: if the loan was taken before the funds were invested in AIM shares: HMRC still looks at the PURPOSE at the time of borrowing. If the survivor borrowed INTENDING to buy AIM shares immediately: s162A may deny the deduction retrospectively. Documentary evidence of the borrowing purpose is important. | S162A, THE BPR DOUBLE DIP TRAP: scenario: Sandra's first husband (Walter) died and created an NRB will trust of £325k. The trust lent £325k to Sandra under a loan agreement. Sandra used the £325k to buy an AIM ISA portfolio. After 3yr (2yr+ holding period for BPR), Sandra dies. Estate: own assets £500k. AIM portfolio: £380k (grown from £325k), 100% BPR qualifying. NRB trust loan: £325k outstanding. EXPECTED IHT CALCULATION: estate = £500k + £380k AIM (BPR exempt: £0) − £325k loan = £175k. IHT = £0 (within NRB £325k). ACTUAL POSITION UNDER s162A: the £325k loan was used to ACQUIRE the AIM portfolio (BPR-exempt property). s162A DENIES the loan deduction. Revised calculation: estate = £500k + £380k AIM (BPR exempt: £0) − £0 (loan denied) = £500k. IHT: 40% × (£500k − NRB £325k − RNRB £175k) = 40% × £0 = £0 (happens to be £0 because Sandra's NRB covers the remaining £500k). BUT: if Sandra's own assets were £700k: IHT = 40% × (£700k − £500k threshold) = £80k. Without s162A denial: IHT = 40% × (£700k + £0 AIM − £325k loan − £500k threshold) = 40% × (£375k − £500k) = £0. S162A COST: £80k extra IHT where the loan deduction is denied. LESSON: NEVER use loan back funds to purchase BPR/APR-qualifying assets. Use the loan for living expenses, normal investments, or gifts. | AVOIDING s162A, SAFE USE OF LOAN BACK FUNDS: the key principle is that the loan back funds must NOT be traceable to the acquisition of BPR/APR-qualifying or IHT-exempt assets. SAFE USES: (1) LIVING EXPENSES: spending the loan back on day-to-day costs (food, utilities, holidays, healthcare, home maintenance) is the cleanest use, no IHT-exempt acquisition. (2) HOME IMPROVEMENTS: spending on the family home (improvements, extensions, decoration) is generally safe, the home itself is taxable in the estate (subject to RNRB, not BPR). The improvement increases the home value (taxable, not exempt). (3) REPAYING A MORTGAGE: paying off a mortgage reduces a previously deductible liability, net neutral effect on the estate. But avoids the s162A risk. (4) NORMAL INVESTMENTS: cash deposits, UK gilts, UK equities (NOT AIM/EIS/BPR-qualifying), ISAs, all taxable on death (no BPR exemption). Safe to invest loan funds here. (5) GIFTS: if the survivor makes gifts from the loan funds: the gifts leave the estate (reducing the estate's value) and use the survivor's gift exemptions/PET clock. Safe, the loan deduction and the gift deduction both reduce the estate, but neither is a 'double exempt' scenario (the gift is not itself exempt property acquired, it leaves the estate as a PET/CLT). TRACING PROBLEM: HMRC uses 'tracing' to determine whether the loan funds ended up in exempt assets. Keep separate bank accounts: (a) personal funds; (b) loan funds. Never commingle loan back money with other savings. If funds are commingled, HMRC may treat all assets purchased from the commingled account as potentially tainted. DOCUMENT THE PURPOSE AT LOAN DATE: the loan agreement should state the intended use of the loan, 'for general living expenses and non-exempt investments'. This documents the purpose at the outset and provides evidence against s162A if HMRC later challenges. |
| Equity release, commercial loans, and other legitimate deductible liabilities | EQUITY RELEASE AND IHT: equity release products (lifetime mortgages; home reversion plans) create a deductible liability against the estate under s162 IHTA, reducing the taxable estate by the outstanding mortgage balance on death. A lifetime mortgage on the family home: (a) the homeowner releases equity from their home (e.g., £200k cash); (b) the mortgage grows over time (rolled-up interest, no monthly payments); (c) on death: the outstanding mortgage (grown to say £350k) is repayable from the estate. The £350k liability reduces the taxable estate under s162 IHTA. DOES s162A APPLY TO EQUITY RELEASE? The equity release liability (the mortgage) was incurred to release the value of the home. The home is taxable in the estate (not BPR/APR-exempt, unless the home is an unusual qualifying asset). Therefore s162A does NOT apply to standard equity release. The deduction is valid. NOTE: equity release reduces the home value available for RNRB purposes. The RNRB applies to the net value of the qualifying residential interest (after deducting the mortgage). If the mortgage exceeds the value of the home (in extreme cases): the RNRB is nil. COMMERCIAL LOANS: loans taken in commercial contexts (a bank loan to fund a business) are deductible under s162 if: (a) the loan is legally enforceable; (b) incurred for consideration in money or money's worth; (c) used for the business purpose. s162A: if the loan is used to fund BPR-qualifying business assets, the deduction may be denied. BUT: for genuine business loans (bank lending to a trading company), HMRC typically accepts the deduction is not denied by s162A, because the commercial substance of the business borrowing is genuine. LOANS TAKEN TO FUND GIVING: some IHT planners suggest borrowing (e.g., via a bank loan) and using the loan proceeds to make a large PET (gift out of the estate). The PET uses the 7yr rule; the outstanding loan reduces the estate. s162A: the loan was not used to acquire exempt assets, the gift was a PET (taxable if donor dies within 7yr; exempt if donor survives). Generally accepted as valid under s162 (provided genuine). HMRC SCRUTINY: HMRC is alert to schemes that artificially create deductible liabilities without genuine commercial substance. Any arrangement that: (a) creates a liability with no real obligation to repay; or (b) uses a connected-party 'debt' that in practice will never be called in; or (c) is solely motivated by IHT avoidance without any other commercial rationale, is at risk of HMRC challenge under s162A or the GAAR. | EQUITY RELEASE AND IHT, EXAMPLE: Patricia (age 80) owns her home (£600k) outright. She takes a lifetime mortgage of £100k (interest rolls up at 5%/yr). At her death (10yr later): outstanding mortgage = £100k × (1.05)^10 = £163k (rolled up). Patricia's estate: home £600k − mortgage £163k = net home value £437k. Own assets £200k. Total estate (gross): £800k. Deductible mortgage: £163k. Net estate: £800k − £163k = £637k. RNRB: applies to the NET value of the home = £437k (but RNRB max is £175k, so RNRB = £175k, capped). NRB: £325k (Patricia is a widow with TNRB: TNRB = £325k). Total threshold = £325k + £325k TNRB + £175k RNRB + £175k TRNRB = £1m. Net estate: £637k < £1m threshold. IHT = £0. THE EQUITY RELEASE ACHIEVES: (a) £100k of cash for Patricia to use during her lifetime; (b) reduces the taxable estate via the mortgage deduction; (c) the RNRB applies to the reduced home value. NOTE: if Patricia had GIVEN the £100k to her children instead (PET) and survived 7yr: similar IHT outcome without the lifetime mortgage. Equity release is more useful where giving £100k would affect Patricia's financial security, she retains the £100k for living expenses. | PRACTICAL PLANNING WITH DEDUCTIBLE LIABILITIES, KEY PRINCIPLES: (1) ALL GENUINE DEBTS REDUCE THE IHT ESTATE: review the deceased's debts on death for all potential deductible liabilities, mortgages; bank loans; credit card balances; trade debts; outstanding tax; hire purchase; equity release. Ensure the personal representatives claim all legitimate deductions. (2) DOCUMENT OUTSTANDING LOANS FROM TRUSTS: if the deceased was a beneficiary of a will trust that had lent funds (loan back), ensure the loan agreement is located and the outstanding balance is documented at date of death. Include in the IHT400 as a deductible liability. (3) EQUITY RELEASE, CHECKLIST AT DEATH: obtain the outstanding equity release balance from the lender at the date of death. This is the deductible liability. Note: rolled-up interest on a lifetime mortgage creates a larger liability than the original advance, the full outstanding balance (including accrued interest) is deductible. (4) HMRC SCRUTINY OF LARGE LIABILITIES: HMRC may challenge deductions for large liabilities where the liability appears artificial. Ensure: (a) written evidence of the liability (loan agreement, mortgage deed, bank statements); (b) the liability was commercially created; (c) the liability is legally enforceable; (d) repayment was genuinely intended. (5) LOANS FROM NON-UK LENDERS: foreign currency loans or loans from offshore entities are deductible under s162 if legally enforceable in England and Wales. Consider whether there is any excluded property or non-UK situs issue. (6) CONNECTED PARTY LOANS, EXTRA SCRUTINY: a loan from a connected party (child, friend, controlled company) requires extra documentation. HMRC is alert to 'paper' connected-party liabilities with no real repayment expectation. Include all correspondence and payment records. |
IHT loan back UK 2026. IHTA 1984, s162: 'In determining the value of a person's estate immediately before his death liabilities of the estate shall be taken into account … provided that … a deduction shall not be made for a liability unless the liability was incurred by the deceased for consideration in money or money's worth, or is imposed by law, or relates to business debts or a deduction for interest on loans.' s162(4): '… A deduction is only allowed if the liability is enforceable against the estate and will be discharged out of the estate of the deceased.' IHTA 1984, s162A (inserted by Finance Act 2013, s176): '(1) A liability to the extent that it is attributable to financing, (a) the acquisition of property which is excluded property at the time of the chargeable event, or (b) the acquisition, maintenance or enhancement of property to the extent that, at the time of the chargeable event, an exemption or relief under this Act prevents the value of the property being taken into account, shall not be taken into account as a liability.' This is the key provision denying the loan deduction where the loan funds acquired BPR/APR-qualifying assets. 'Exempt property' in s162A context: property where IHT relief prevents it being taken into account, BPR (s104 IHTA), APR (s116 IHTA), HMRC's interpretation: IHTM28020 et seq (deductible liabilities); IHTM28380-IHTM28389 (loans from trusts, loan back arrangements); IHTM28385 (s162A, artificial debts and BPR double dip prevention). General Anti-Abuse Rule (GAAR, Finance Act 2013, Part 5): can apply to abusive IHT arrangements. A genuine NRB will trust loan back is NOT normally GAAR-abusive (HMRC accepted planning). Artificial schemes with no genuine trust structure or no genuine obligation to repay are GAAR candidates. Equity release and s162: equity release lifetime mortgage interest is deductible as it accrues (if mortgage deed provides for rolled-up interest, the entire balance including accrued interest is the deductible liability on death). Home reversion plans do NOT create a deductible liability (the home reversion involves selling a share of the property to the plan provider, no debt created). Equity release RNRB interaction: s8H(2) IHTA, the RNRB applies to the 'qualifying residential interest' (QRI) which is the deceased's interest in a dwelling-house. The QRI is valued NET of the outstanding mortgage (equity release balance). A large lifetime mortgage can significantly reduce the QRI value available for RNRB. Where the QRI value (net of mortgage) is less than the available RNRB, the RNRB is restricted to the net QRI value.
Frequently Asked Questions
What is an IHT loan back and how does it reduce inheritance tax?
An IHT loan back is an arrangement where a trust (typically a nil-rate band discretionary will trust created by the first spouse's will) lends its assets back to the surviving spouse under a formal loan agreement. Under s162 IHTA 1984, legally enforceable debts owed by the deceased are deducted from the estate for IHT. On the surviving spouse's death, the outstanding loan (up to £325k) reduces the taxable estate by that amount, saving up to £130k IHT (40% × £325k). The loan must be a genuine documented commercial arrangement: written loan agreement, separate trust bank account, and real assets held in trust before the loan is made. HMRC accepts NRB will trust loan backs as valid IHT planning (IHTM28382).
What is s162A IHTA and when does it deny the loan back deduction?
Section 162A IHTA 1984 (introduced by Finance Act 2013) denies the deduction for a debt where the liability was incurred to finance the acquisition of property that is exempt from IHT, including BPR-qualifying assets (AIM shares, EIS shares, family business shares) and APR-qualifying assets (farmland). If a surviving spouse uses the loan back funds to buy AIM shares (100% BPR-qualifying), the loan deduction is denied on the survivor's death, because the borrowing funded exempt property, creating an otherwise illegitimate double benefit (loan deduction + BPR exemption on the same assets). Safe uses of loan back funds: general living expenses, mortgage repayment, non-exempt investments (ISAs, bank deposits, mainstream equities), gifts.
Does equity release reduce inheritance tax?
Yes, equity release creates a deductible liability under s162 IHTA 1984. A lifetime mortgage on the family home grows over time (rolled-up interest) and reduces the taxable estate on death by the full outstanding balance. Section 162A IHTA does not normally apply to equity release because the liability funded the home (which is taxable in the estate, not BPR/APR-exempt). However, equity release reduces the net value of the qualifying residential interest (the home after the mortgage), which reduces the RNRB available. The RNRB applies to the net home value after deducting the mortgage, a large lifetime mortgage can significantly reduce the RNRB.
Can I use a loan back if I want to invest in AIM shares?
No, if you use loan back funds to buy AIM shares (or any BPR-qualifying assets), the loan deduction will be denied under s162A IHTA 1984 on your death. Section 162A specifically targets the 'double dip' of claiming both a loan deduction and a BPR exemption on the same assets. If you want to invest in AIM shares for BPR, use your own non-borrowed funds. Keep the loan back funds entirely separate, use them for living expenses or non-exempt investments. Commingling loan funds with personal savings makes it harder to demonstrate to HMRC that the loan did not fund the BPR assets.
What evidence does HMRC require for a valid loan back deduction?
HMRC requires evidence that the loan back is a genuine commercial arrangement, not a sham. Key documentation: (1) written loan agreement signed and dated at the time the loan was made (not backdated); (2) separate trust bank account showing receipt of trust assets and then the loan transfer to the surviving spouse; (3) annual trust accounts showing the loan balance; (4) repayment of the loan on the surviving spouse's death (the personal representatives must actually repay the trust from the estate). Where the surviving spouse is a co-trustee of the NRB trust (common practice), a professional co-trustee's involvement adds credibility. HMRC (IHTM28382) accepts genuine NRB will trust loan backs, but will challenge arrangements where the trust is not genuine, the loan is not documented, or the funds are immediately reinvested in exempt assets.
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