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The newly released Home Office file showed how the Iron Lady was made to act to avoid a court case that would threaten to expose the secrets of the SAS and allow soldiers to be sued for doing their duty. The building in Princes Gate became the focus of world attention in 1980 when the Special Air Service was filmed abseiling and using battering rams to storm it in a dramatic rescue of 24 hostages. One died and another had earlier been shot dead, sparking the dramatic rescue.

GETTY/ REX Margret Thatcher was forced to pay for the rebuilding of the Iranian embassy

Operation Nimrod ended a six-day siege by members of a radical Iran Arab group – but also left the magnificent South Kensington building in ruins. Iran’s new Islamic ruler, Ayatollah Khomeini, immediately called for Britain to foot the £2 million repair bill, arguing that it was the SAS who had caused the damage during the 17-minute raid. For two years the demand was brushed aside by Mrs Thatcher, furious at a regime expecting cooperation while holding 52 US nationals hostage in Tehran’s US Embassy, as well as four Britons.

REX The SAS soldiers broke into the embassy to rescue 24 hostages

The siege propelled the SAS to global fame. The assault team later revealed the Prime Minister even gave orders for them not to use smoke screens, so as to not obscure TV cameras as the group swung through Embassy windows.

The damage was directly caused by the SAS rescue operation The document

Such was the image of the regiment that it was even “loaned” to allies to resolve terror and hostage-related disputes in foreign countries. Their secret war on terror was nearly compromised when Iran threatened to sue. The dossier reveals how, within weeks, a stunning letter arrived from Iran’s Essex-based insurance brokers. Sent by recorded delivery, it demanded payment for damage to the embassy and contents from the “unfortunate incident”, adding: “It would seem the damage was directly caused by the SAS rescue operation which itself took place under the direct orders of Her Majesty’s Government.”

GETTY The South Kensington building was left destroyed by the siege

It was the first time anyone had tried to sue the Government since 1978, when the owner of a car blown up by the Army in Northern Ireland claimed compensation. Ministers feared that paying for damage caused by the military operating under Metropolitan Police supervision would create a legal minefield. It would also be “distasteful” and cause “public outrage” given “the brutal and unpopular nature of the Iranian regime”, ministers agreed. A letter by Foreign Secretary Francis Pym eventually forced Mrs Thatcher’s hand.

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REX Iran demanded that Britain foot the £2million repair bill