Income tax deduction for loan interest

Hi folks

Second query in succession!

Estate has large property portfolio, and IHT to pay.

Legatee would rather the properties aren’t part-sold to pay IHT, and would prefer to take on bank borrowing to enable the IHT to be paid outright, so that properties can be passed ‘intact’, but with responsibility for borrowing also passing to the legatee.

Legatee is a discretionary trust. If the legatee borrows money to pay the IHT, can it deduct the interest cost as a rental expense against rental income from the properties for income tax purposes, once they have been transferred?

Would it be better (or possible) for the executors to borrow, and then transfer the properties and the borrowing to the legatee, or would this make no difference to the income tax treatment?

Many thanks for any comments or guidance!


As this is property, there is the option to pay the IHT in instalments over 10 years rather than in one go, although sales of any instalment property will crystalise the IHT.
HMRC guidance suggests that only the personal representative gets any income tax relief for loans taken out to pay IHT and then only interest incurred for a 12m period, although there is some flexibility as to how that might be offset.

The rules on deduction of loan interest from rental income (except in the hands of a company) have also been severely restricted over recent years such that there is now a maximum 20% deduction.

The rules for deductibility of interest against property income are those applicable to trading income [ITTOIA 2005 Part 2].

The suggested borrowings are not being used for “property” purposes but to fund an IHT charge and any interest thereon is therefore not deductible against any rental income in computing property profit.

Rules for interest deductibility are also contained in ITA 2007 s383 et al but are of no use here although ITA 2007 s403/404 do provide for a deduction wrt to interest payable on borrowings by PRs to discharge an IHT liability arising on death (albeit only for a one year period).

Malcolm Finney