Foreign currency accounts could be used to sidestep restrictions introduced by Finance Act 2013, which disallow the deduction of certain liabilities for inheritance tax purposes. The provisions disallow a deduction for liabilities used to acquire ‘excluded property’ (broadly, non-UK property owned by a non-UK domicile). Although foreign currency bank accounts situated in the UK are not ‘excluded property’, they are not taken into account for inheritance tax on the death of a person who is both non-UK domiciled and non-UK resident immediately before their death. As the accounts are not excluded property there is no restriction on the deduction of liabilities used to fund such an account.
For deaths occurring on or after the date of Royal Assent to Finance Bill 2014, no deduction will be allowed for liabilities incurred to fund foreign currency bank accounts. It will not matter when the liability was incurred.
This change will affect non-UK resident and non-UK domiciled individuals with foreign currency bank accounts funded by borrowed funds, particularly arrangements made to sidestep the changes introduced by Finance Act 2013.