M12. Guaranteeing a debt

INHERITANCE TAX

- Giving a guarantee as a transfer of value

- If a guarantee is given and there is, at the time it is given, little prospect of the borrower paying the debt, this may be a lifetime transfer (IHTM28356).

- If there was some prospect of repayment, the transfer may be reduced (IHTM28356).

- But note that the liability only reduces T's estate if incurred for consideration (s.5(5)).

Legislation:

Cases:

HMRC manuals:

IHTM28356 - Liabilities: investigating form IHT419: lifetime transfers on guarantee debt;

Commentary:

- Crystallisation and payment of a liability under guarantee

Deduction for the liability in determining estate

- Liabilities are only deductible to the extent they are incurred for consideration (s.5(5) - unless imposed by law).

- If the guarantee was given as part of the terms for granting credit, e.g., to T's company HMRC indicate they will accept the guarantee debt was incurred for consideration (IHTM28353).

- This means T's estate may reduce, giving a transfer of value.

- T may need to rely on s.10.

- Guaranteeing a family member's debts may not be for consideration, however.

- If not for consideration, does not reduce T's estate.

Paying the liability

- If the liability was deductible in calculating T's estate, paying the liability should not further reduce T's estate.

- If the liability was not deductible, paying the liability will give rise to a reduction in T's estate.

- HMRC say treat as a transfer to the borrower (IHTM28356).

Legislation:

Cases:

HMRC manuals:

IHTM28353 - Liabilities: investigating form IHT419: consideration for a guarantee debt;