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Britain's Ministry of Defence (MoD) is withholding £400 million owed by the UK government to Iran from a 30-year-old British tank sale even though it could help secure the release of jailed British-Iranian woman Nazanin Zaghari-Ratcliffe, the Guardian on Tuesday.

An international arbitration court has ruled that the £400 million should be transferred. Ministerial sources told the Guardian that the successive defence secretaries Sir Michael Fallon and Gavin Williamson have refused on the grounds that it would aid the Iranian Revolutionary Guard and its agenda in countries such as Yemen, Syria and Lebanon.

Zaghari-Ratcliffe, a UK-Iranian dual citizen, was jailed by Tehran authorities in 2016 after being accused of plotting against the government, charges she denies. She was handed a five-year jail sentence for sedition.

Although Iran has not explicitly connected Zaghari-Ratcliffe's ongoing imprisonment and Britain's debt, there have reportedly been private indications by the Iranians that the two are connected.

A high court is due to rule on the outstanding payment soon after both the UK and Iran submitted their arguments last week.

The Guardian reported divisions between the Foreign Office and the MoD on the outstanding debt. "Some members of the government have argued that the UK lost the international arbitration case, owed the money and had to show a willingness to work with Iran," the newspaper wrote.

Court papers, unveiled after the Sunday Times won a court order allowing access to the documents, showed Iran requesting the Treasury to approve the payment "from a government-owned defence company to the Central Bank of Iran".

EU sanctions on Iran make payment difficult but Iran believes it can be done without breaching the sanctions.

The original dispute dates back to 1971, when International Military Services (IMS) - a now failing UK government defence trading service - agreed to sell 1,500 tanks to the Shah of Iran.

After the Shah was deposed eight years later, the contracts were cancelled but Iran had already paid for the undelivered tanks.

In 2001, an international chambers of commerce in the Hague ruled in favour of Iran and the repayment of the funds - to which IMS launched an appeal.

The British Foreign Secretary Jeremy Hunt claims Zaghari-Ratcliffe is being used as a diplomatic pawn and described the payment of the £400m as ransom money.

"The problem is if you pay ransom money to someone who is a hostage then all that happens is you might get that hostage out, but the next time they want something they'll just take someone else hostage. That is the conundrum we have," Hunt told Radio 4.

The UK government have received criticism for how they have dealt with the case - keeping the court hearings and their dates private.

Ratcliffe told the Guardian the case "matters to us since we have been told explicitly that we are linked to this court case. It feels like we are a very explicit bargaining chip that is being used."

The UK granted Zaghari-Ratcliffe - who remains separated from her daughter - diplomatic protection in March in a bid to free her.

Zaghari-Ratcliffe has suffered from health issues, including undergoing tests for breast cancer and a series of panic attacks, while her emotional state has worsened during her confinement.

A project manager with the Thomson Reuters Foundation, the media group's philanthropic arm, she was arrested in April 2016 as she was leaving Iran after taking her infant daughter to visit her family.

Agencies contributed to this report.

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