Loans and Inheritance Tax UK 2026: Deductible Liabilities (s162 IHTA), FA 2013 Anti-Avoidance, Family Loans, and Interest-Free Loans as Gifts
A genuine loan reduces the estate for IHT — but only if incurred for money or money's worth. Finance Act 2013 blocked loans used to acquire excluded property. An informal family loan with no documentation is a gift HMRC will not let you deduct.
Document Every Family Loan — HMRC Will Challenge Undocumented 'Loans' as Gifts
An undocumented family loan with no interest payments and no repayments: HMRC will argue this is a gift, not a loan — therefore NOT deductible from the borrower's estate AND potentially a PET chargeable in the lender's estate. Document family loans with a written agreement; charge HMRC official rate interest (2.5%); make regular payments; keep records. The paperwork is the difference between a deductible liability and a chargeable gift.
| Aspect | Rule / Principle | Detail / Example | Planning Guidance |
|---|---|---|---|
| General rule — deductible liabilities (s162 IHTA 1984) | THE GENERAL RULE (s162(1) IHTA 1984): a liability is deductible from a person's estate for IHT if: (a) it is legally enforceable (the liability can be enforced against the estate by the creditor); and (b) it was incurred for MONEY OR MONEY'S WORTH (the deceased actually received something of value in return — cash, goods, services — in consideration of the liability). Both conditions must be met. A LIABILITY IS NOT DEDUCTIBLE IF: (a) it was incurred as a gift (no consideration — the deceased 'owes' someone money but received nothing in return: not a genuine liability for IHT); (b) it is a contingent liability that may or may not crystallise (contingent liabilities are generally not deductible — only definite, quantifiable liabilities); (c) it is statute-barred (the creditor can no longer enforce it — the limitation period has passed); (d) it relates to excluded property in specific circumstances (FA 2013 rules — see below). | WHAT IS DEDUCTIBLE: (1) MORTGAGE: the outstanding balance of a mortgage secured on a property is deductible from the estate (the mortgage was taken out for money — the loan proceeds were used to buy the property). (2) BANK LOANS AND OVERDRAFTS: a loan from a bank (commercial loan; personal loan; business overdraft) is deductible — incurred for money; legally enforceable. (3) CREDIT CARD BALANCES: outstanding credit card debt at death is deductible — incurred for goods/services (money's worth). (4) INCOME TAX LIABILITIES: income tax due on earnings or income received before death but not yet paid: deductible. (5) CARE FEES: fees for residential care that have been incurred but not yet paid at death: deductible. (6) FUNERAL COSTS: reasonable funeral costs are deductible (a specific allowance — not unlimited; HMRC allows reasonable costs for a funeral, headstone, and death notices). | WHAT IS NOT DEDUCTIBLE (BEYOND FA 2013): (1) PROMISES TO PAY: if the deceased promised to pay someone money but received nothing in return (a purely gratuitous promise): not a liability for IHT (it was effectively a gift — and was not 'incurred for money or money's worth'). (2) STATUTE-BARRED DEBTS: a debt that cannot be enforced because the limitation period has expired (6yr for simple contracts in England/Wales under the Limitation Act 1980) is not deductible. If a debt has been dormant for 12yr or more: it is likely unenforceable and not deductible. (3) CONTINGENT LIABILITIES: a guarantee given by the deceased (where they guaranteed someone else's debt): not deductible unless the guarantee has been called (the debt has crystallised as a definite liability on the deceased). Specialist advice on contingent guarantee liabilities in an estate. (4) LIABILITIES OUTSIDE s162: certain specific liabilities are excluded from deductibility by the IHTA itself (e.g., liabilities created artificially for IHT purposes — the FA 2013 provisions). |
| Finance Act 2013 anti-avoidance — s162A-s162C IHTA (liabilities on excluded property and exempt assets) | THE FA 2013 PROVISIONS (s162A-s162C IHTA 1984, inserted by Finance Act 2013 s176): introduced to counter specific liability-manipulation IHT planning schemes. Three main restrictions: (1) s162A IHTA — LIABILITY USED TO ACQUIRE EXCLUDED PROPERTY: a liability is not deductible to the extent it was used to acquire, maintain, or enhance EXCLUDED PROPERTY (overseas assets outside UK IHT for a non-LTUK/non-dom person). The anti-avoidance: a non-LTUK person takes a loan (secured on their UK estate); uses the loan proceeds to buy overseas property; the overseas property is excluded property (not in the UK IHT estate); the loan reduces the UK estate (deductible liability). Net effect: the UK IHT estate was reduced by the loan, BUT the overseas property bought with the loan was outside the IHT estate anyway — 'double benefit'. s162A blocks this: the loan (used to acquire excluded property) is not deductible from the UK estate. | (2) s162B IHTA — LIABILITY USED TO ACQUIRE CHARITY-EXEMPT PROPERTY: a liability used to acquire an asset that passes to charity on death (and is therefore exempt from IHT under s23 IHTA) is not deductible. The anti-avoidance: take a loan; buy an asset; will the asset to charity (exempt); the asset is outside IHT (charitable exemption); the loan also reduces the IHT estate (deductible liability). Net: double relief. s162B blocks this: the loan is non-deductible to the extent the asset it funded passes to charity. (3) s162C IHTA — REPLACEMENT BORROWING: a liability incurred to REPAY another non-deductible liability (one caught by s162A or s162B) is itself non-deductible. This prevents 'chain refinancing' to escape the anti-avoidance. INTERACTION WITH MORTGAGES ON OVERSEAS PROPERTY: a non-LTUK individual who borrows money on a UK mortgage and uses the proceeds to buy overseas property: the UK mortgage is NOT deductible under s162A (it was used to acquire excluded property). The overseas property is excluded (not in the UK IHT estate). The UK mortgage therefore BOTH reduces the UK estate AND the overseas property is excluded — double benefit; blocked by s162A. | PRACTICAL IMPLICATIONS OF FA 2013 FOR ESTATE PLANNING: (1) MORTGAGES ON UK PROPERTY: a mortgage used to BUY a UK property is fully deductible — the UK property is UK-situs (within UK IHT); the loan is used to acquire it (not excluded property). No s162A issue. (2) MORTGAGES ON OVERSEAS PROPERTY (borrowed in UK): if a UK individual takes a UK loan and buys an overseas property — s162A applies; loan non-deductible; overseas property excluded. The net IHT position: UK IHT applies to the UK loan (as it is not deducted from the UK estate) AND the overseas property is outside IHT. The individual has effectively borrowed money and bears IHT on the loan. WORSE than not borrowing. (3) PLANNING WITH OVERSEAS MORTGAGES: if the overseas property is mortgaged in the OVERSEAS JURISDICTION (the loan is secured on the overseas property and is owed to a foreign lender): the position is different — the loan is against the overseas asset; both the asset and the loan are outside UK IHT (excluded property; the liability matches the asset). Specialist advice needed. (4) BUSINESS LOANS: a loan used to finance a UK business (trading activity) is deductible from the estate — the business assets themselves are UK-situs and in the estate (potentially with BPR). No s162A issue. |
| Family loans — are they deductible for IHT? | GENUINE FAMILY LOANS ARE DEDUCTIBLE: a genuine loan from one family member to another (e.g., parent lends money to child; grandparent lends money to grandchild) creates a legally enforceable liability. The LENDER's estate: includes the loan as an asset (a debt owed to them — s5 IHTA: all property to which the person is beneficially entitled). The BORROWER's estate: deducts the loan as a liability (s162 IHTA — the loan is deductible if incurred for money). REQUIREMENTS FOR A GENUINE FAMILY LOAN: (1) A LOAN AGREEMENT: ideally a written loan agreement (signed by both parties; stating the amount; the interest rate if any; the repayment terms). Verbal loans are legally valid in England & Wales (no formal requirement for a loan agreement to be in writing for a personal loan — unlike a mortgage, which must be in writing). But: verbal loan agreements are hard to prove and HMRC will scrutinise them carefully. (2) ACTUAL TRANSFER OF MONEY: the money must actually have been transferred from lender to borrower (not just 'agreed' — a paper transaction without actual money movement is suspicious). (3) REPAYMENT EXPECTATION: there must be a genuine expectation of repayment (even if no repayments have been made yet). An agreement that states the loan is repayable 'on demand' is deductible even if never called in during the lender's lifetime. | HMRC'S APPROACH TO FAMILY LOANS: HMRC scrutinises inter-family loans that purport to be deductible liabilities in estates. HMRC looks for: (a) lack of documentation (no written agreement); (b) no interest charged or paid (a commercial lender would charge interest — a zero-interest loan may look more like a gift); (c) no repayments made (the 'loan' has been outstanding for years with no repayment or even discussion of repayment); (d) the 'loan' arising after the lender's death (documented only in the deceased's papers — not established during lifetime). HMRC's argument: where a loan shows all the characteristics of a gift (no documentation; no interest; no repayments; no commercial terms): it is a GIFT, not a loan. If a gift: (i) not deductible from the borrower's estate; (ii) a PET from the lender's estate (reducing the lender's estate if they survived 7yr; chargeable if they died within 7yr). Lesson: document family loans properly; charge commercial or HMRC official rate interest (2.5% as at 2026 — the official rate for beneficial loans); make some regular repayments (even small ones) to demonstrate the genuine loan nature. | FAMILY LOAN PLANNING — BEST PRACTICES: (1) DOCUMENT EVERY FAMILY LOAN: use a solicitor-drafted loan agreement. Include: the loan amount; the interest rate (at least HMRC official rate: 2.5%); repayment terms (interest-only; capital repayable on demand; or fixed term); what happens on the death of the lender or borrower. (2) CHARGE AT LEAST THE HMRC OFFICIAL RATE: HMRC's official rate for beneficial loan arrangements (from April 2023: 2.5%). Charging this rate avoids HMRC characterising the loan as a gift and removes any POAT (Pre-Owned Asset Tax) issue if the loan is connected to occupied property. (3) MAKE REGULAR INTEREST PAYMENTS: the borrower should pay the interest regularly (ideally monthly by standing order). Interest payments demonstrate the loan is genuine. (4) KEEP RECORDS: keep records of all payments made — bank statements showing interest payments. (5) REVIEW PERIODICALLY: if circumstances change (the borrower can no longer afford interest; the lender needs the money back): update the agreement. A FORMAL DEED OF RELEASE (writing off the loan): this is a GIFT by the lender (a PET if to an individual). It starts the 7yr clock for IHT. Keep track of all loan write-offs as part of the lender's IHT planning. |
| Interest-free loans between family members — IHT treatment | IS AN INTEREST-FREE LOAN A GIFT FOR IHT PURPOSES? A loan that charges NO interest: is the absence of interest a gift (a transfer of value by the lender — waiving interest income they could have earned)? ANSWER: the waiver of interest on a personal loan between individuals is NOT a transfer of value for IHT under s29A IHTA 1984. s29A IHTA: a waiver of remuneration is a transfer of value only if the waiver is of remuneration in the sense of payment for services. An interest-free family loan is not 'remuneration' — it is a financing arrangement. There is no transfer of value simply by charging 0% interest on a personal loan. HOWEVER: the OFFICIAL RATE FOR BENEFICIAL LOANS: for INCOME TAX purposes (not IHT), a loan at below the HMRC official rate (currently 2.5%) from an employer to an employee gives rise to a taxable benefit in kind (beneficial loan benefit — s175 ITEPA 2003). This applies to employer-employee loans, NOT purely private family loans between unconnected individuals. | WHEN AN INTEREST-FREE LOAN BECOMES A GIFT — WRITE-OFF: if the lender WRITES OFF (releases/forgives) the loan: the write-off IS a transfer of value — a gift by the lender to the borrower of the amount written off. IHT consequences: (a) if the write-off is to an individual (the borrower): it is a PET — potentially exempt if the lender survives 7yr; chargeable at death within 7yr (taper applies). The value of the PET = the amount of the loan written off. (b) The lender's estate: reduces by the amount written off (the loan was an asset; it is now gone). (c) The borrower's estate: the deductible liability disappears (the loan is written off; no longer deductible). A loan of £200k written off: PET of £200k from the lender's estate; the lender must survive 7yr for this to be IHT-free. LOAN RELEASE ON DEATH: if the LENDER'S WILL releases the loan on their death ('I forgive and release the debt owed by my son John'): this is a testamentary gift — treated as a legacy of £[loan amount] to the borrower. The loan is treated as part of the estate (not as a write-off during life) — it passes by the will as a legacy. IHT is calculated on the estate including the loan; the legacy of the loan release reduces the residue. | LOAN SCHEME ANTI-AVOIDANCE — DEEDS OF VARIATION AND LOANS: a specific planning device (now largely blocked): the deceased's estate owes a loan to a family trust (the 'debt scheme' or 'double trust scheme'). Under this scheme: the surviving spouse (or other beneficiary) 'owes' the estate a debt (via a deed of arrangement or family agreement); the debt is then written off by the estate; the write-off is a PET from the estate to the surviving spouse; the estate reduces in value (the debt is gone); the surviving spouse's estate increases (but they received it as a transfer from the estate — potentially exempt under s18 or as a PET). HMRC challenged many of these schemes under GAAR and specific anti-avoidance provisions. The 'double trust' or 'Ingram scheme' (before it was legislated against) and later 'debt/charge' schemes have been subject to specific statutory countermeasures. GAAR WARNINGS: the General Anti-Abuse Rule (FA 2013 Part 5) applies to IHT avoidance arrangements that are 'abusive'. Any scheme involving loans or debt manipulation for IHT purposes should be reviewed against GAAR. Specialist advice essential: these are complex areas where poorly implemented arrangements can result in HMRC successfully challenging the deductibility of the liability and imposing IHT on what the taxpayer thought was protected. |
| Loans from the estate to beneficiaries — outstanding at death | LOANS FROM DECEASED TO BENEFICIARIES: it is common for a parent to lend money to a child during their lifetime. On the parent's death: the loan is an ASSET in the parent's estate (a debt owed to them). The executors must include the loan in the IHT400 at its full value. The child's liability to repay the loan is a deductible liability in the CHILD's estate (if the loan is genuine under s162 IHTA). THE EXECUTOR'S OPTIONS: (1) CALL IN THE LOAN: the executor demands repayment from the child (borrower). The child repays; the estate is swelled by the repayment. The loan disappears as an asset and the child no longer has the deductible liability. (2) WRITE OFF THE LOAN (via the WILL or the estate administration): (a) if the will directs the executor to write off the loan ('I forgive the loan to my son John'): the write-off is a legacy; IHT is paid on the estate including the loan; the legacy (write-off) is then made. (b) if the executor writes off the loan as part of the estate administration (no will direction): this is a distribution of the estate to the child — a legacy of the loan value. (3) ASSIGN THE LOAN TO ANOTHER BENEFICIARY: the executor assigns the right to collect the loan to another beneficiary (as part of their share of the estate). The assignee then has the right to collect the loan from the borrower. | LOAN WAIVER AS A DEED OF VARIATION: the beneficiaries of the estate can use a DEED OF VARIATION (s142 IHTA 1984) to vary the will provisions and direct that the loan asset passes to the borrowing child (i.e., the loan is written off by agreement of all beneficiaries). The deed of variation is treated as if it were in the original will — the IHT on the estate (including the loan) has already been calculated and paid; the variation then distributes the loan write-off to the borrowing child as their share of the estate. No FURTHER IHT on the variation (s142 'relate-back' treatment — treated as if the deceased made this distribution). If the estate is paying IHT at 40%: a loan of £200k in the estate = £80k IHT. The borrowing child receives the loan write-off (£200k) as their inheritance (after the IHT was paid from the estate). The other beneficiaries' shares are reduced by the loan value. A deed of variation can make this explicit. | INTEREST ON OUTSTANDING LOANS — ACCRUED INTEREST AT DEATH: if the family loan charges interest (even at a low rate): any ACCRUED but unpaid interest at the date of death is an asset of the deceased's estate (income accrued but not received). The accrued interest must be included in the IHT400. The borrower's estate: may have a corresponding liability for the accrued interest (if the interest was legally owed and had accrued). HMRC AND OUTSTANDING LOANS: when reviewing an estate, HMRC will check: are all outstanding loans to family members included as assets? Is the interest accrued correctly? Are the claimed deductible liabilities (loans owed by the deceased) genuine? HMRC can open an enquiry into the IHT400 within 4yr of the date the return was filed (or 20yr for careless/deliberate understatements). Executors should ensure all outstanding family loans (whether lent by or borrowed by the deceased) are correctly accounted for in the IHT400 — with supporting documentation (loan agreements; repayment records; bank statements). |
Loans and IHT UK 2026. s162 IHTA 1984: 'A liability incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money's worth.' s162(1): a liability is deductible from a person's estate if: (a) it satisfies the 'money or money's worth' test; (b) it is legally enforceable. Finance Act 2013 s176: inserted ss162A-162C into IHTA 1984 with effect from 6 April 2013. s162A IHTA 1984 (liability attributable to financing excluded property): a liability is not deductible to the extent it is used to finance (i.e., acquire, maintain, or enhance) excluded property under s6 or s48(3) IHTA 1984. 'Excluded property' = overseas assets where the person is not UK-domiciled/not LTUK. s162B IHTA 1984 (liability attributable to financing property relieved by charitable exemption): a liability is not deductible to the extent it finances property that passes to a charity on death (charitable legacy — s23 IHTA exempt). s162C IHTA 1984 (replacement of non-deductible liability): a liability incurred to replace a non-deductible liability (caught by s162A or s162B) is also non-deductible. The policy intention of FA 2013 ss162A-162C: prevent the 'double benefit' of borrowing against UK assets (deductible liability reduces UK IHT estate) while using the proceeds to acquire excluded/exempt property (no UK IHT on the purchased asset). The liability deduction and the asset exemption together effectively double the IHT benefit — blocked from 6 April 2013. Funeral expenses: s172 IHTA 1984 — funeral expenses are deductible as a liability of the estate. No statutory limit stated in s172 (unlike the older estate duty rules which had a specific cap). HMRC practice: 'reasonable' funeral costs are deductible; extravagant or unusual expenditure may be challenged. Income tax liabilities: income tax due at death (PAYE underpayment; SA liability for the tax year of death) is a deductible liability — the unpaid tax was incurred for money's worth (the income that gave rise to the tax). VAT liabilities: deductible if arising from a business liability. GAAR (General Anti-Abuse Rule — Finance Act 2013 Part 5): applies to IHT avoidance arrangements that are 'abusive'. Any artificial loan or liability arrangement designed to reduce the IHT estate should be reviewed against GAAR. HMRC's Guidance on GAAR: advisory panel opinions on IHT loan schemes have generally upheld HMRC's position that artificial loan and debt arrangements are abusive. s29A IHTA 1984: waiver of remuneration — a waiver of remuneration (payment for services) is a transfer of value (the waiver deprives the estate of the right to receive the remuneration). This does NOT apply to waivers of interest on personal/family loans — only to waivers of professional or employment remuneration. Interest on beneficial loans (below official rate): s175 ITEPA 2003 — applicable to employer-employee beneficial loan arrangements (not to private family loans between unconnected individuals). The HMRC official rate (for beneficial loans income tax calculation): 2.5% from 6 April 2023 (check HMRC's current rates — it is updated annually). For family loans: charging at least the HMRC official rate provides a commercial appearance and reduces the risk of HMRC treating the loan as a gift. Limitation Act 1980: the limitation period for enforcement of a simple contract debt (including a personal loan) is 6yr from the date the debt became due (in England and Wales). A loan repayable 'on demand': time starts running from the demand. A loan with no repayment date: HMRC's Manuals suggest the debt must be enforceable (not statute-barred) to be deductible — seek specialist advice on old undocumented family loans.
Frequently Asked Questions
Are outstanding loans deductible from an estate for inheritance tax?
Yes — under s162 IHTA 1984, a liability is deductible from a person's estate for IHT if: (a) it is legally enforceable; and (b) it was incurred for money or money's worth (the deceased actually received something of value in exchange). Deductible liabilities include: outstanding mortgage balances; bank loans; credit card debt at death; unpaid income tax; accrued care fees; reasonable funeral costs. The liability reduces the gross estate before the NRB and IHT are calculated. Finance Act 2013 (s162A-s162C IHTA) restricts deductibility where the loan was used to acquire excluded property (overseas assets for a non-LTUK individual), charity-exempt assets, or to replace another non-deductible liability — the double-benefit manipulation strategy is blocked.
Is an informal family loan deductible from the estate for IHT?
A genuine family loan is deductible from the borrower's estate under s162 IHTA 1984 — it reduces the borrower's IHT estate. And it is an asset in the lender's estate. However, HMRC scrutinises inter-family loans where: there is no written loan agreement; no interest has been charged or paid; no repayments have been made; and no commercial terms were agreed. If the 'loan' has all the characteristics of a gift (nothing was expected to be repaid): HMRC will argue it was a gift, not a loan. If a gift: not deductible in the borrower's estate; and the lender made a PET (which may be chargeable if the lender died within 7yr). Best practice: document all family loans with a written agreement; charge at least the HMRC official rate (currently 2.5%); make regular interest payments; and keep bank records showing the money was genuinely transferred.
Is an interest-free loan from a parent to a child a gift for IHT purposes?
No — an interest-free loan is NOT in itself a gift for IHT. The waiver of interest on a personal family loan is not a transfer of value under s29A IHTA 1984 (which covers waivers of remuneration, not personal financing arrangements). There is no IHT consequence simply from charging 0% interest on a personal loan between family members. However: if the lender WRITES OFF (forgives) the loan — the write-off IS a transfer of value and a PET. The amount of the PET = the amount of the loan released. The lender must survive 7yr for the write-off to be IHT-free; if they die within 7yr, taper relief applies. Also: if the lender's WILL releases the loan on death ('I forgive the debt'), this is a testamentary gift — treated as a legacy equal to the loan value from the estate.
Can a loan be used to reduce an estate for IHT planning purposes?
Not artificially — Finance Act 2013 (s162A-s162C IHTA 1984) blocked the main strategy. Before FA 2013: a non-dom/non-LTUK person could borrow money (secured on UK assets; deductible liability), use the loan to buy overseas property (excluded property; outside UK IHT), and thereby reduce their UK IHT estate. From 6 April 2013: s162A IHTA — a liability used to acquire, maintain, or enhance excluded property is NOT deductible. The overseas property is excluded; so the matching loan is also non-deductible. Equally: a loan used to acquire an asset passing to charity (charity-exempt on death — s162B IHTA) is non-deductible. Genuine commercial borrowings (mortgages on UK property; business loans for UK operations) remain fully deductible — s162A/B only target artificial arrangements designed to double-count the tax benefit.
What happens to outstanding family loans when someone dies?
On the death of the LENDER: outstanding family loans are assets of the estate — the debt owed to the deceased is an asset that must be included in the IHT400 at full value (unless it is known to be irrecoverable). The executors can: (1) call in the loan (demand repayment from the borrower); (2) use the loan as part of a beneficiary's share of the estate (the borrowing beneficiary 'receives' the loan write-off as their inheritance); (3) vary the will by deed of variation (s142 IHTA, within 2yr of death) to direct how the loan is dealt with. On the death of the BORROWER: the outstanding loan is a deductible liability in the borrower's estate (if it is a genuine loan under s162 IHTA). The executors must pay the loan from the estate (or negotiate a write-off with the lender). The lender (or lender's estate) receives the repayment — which increases the lender's estate for IHT on the lender's subsequent death.
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