diff --git a/compiler/backend/src/org/jetbrains/kotlin/codegen/inline/InlineCodegen.kt b/compiler/backend/src/org/jetbrains/kotlin/codegen/inline/InlineCodegen.kt
index 6423acad68b..156e25f423d 100644
--- a/compiler/backend/src/org/jetbrains/kotlin/codegen/inline/InlineCodegen.kt
+++ b/compiler/backend/src/org/jetbrains/kotlin/codegen/inline/InlineCodegen.kt
@@ -320,8 +320,7 @@ abstract class InlineCodegen<out T : BaseExpressionCodegen>(
 
                 val splitBy = SimpleInterval(start.info as LabelNode, extension.finallyIntervalEnd)
                 processor.tryBlocksMetaInfo.splitAndRemoveCurrentIntervals(splitBy, true)
-
-                //processor.getLocalVarsMetaInfo().splitAndRemoveIntervalsFromCurrents(splitBy);
+                processor.localVarsMetaInfo.splitAndRemoveCurrentIntervals(splitBy, true);
 
                 mark.dropTo()
             }
@@ -330,8 +329,7 @@ abstract class InlineCodegen<out T : BaseExpressionCodegen>(
         }
 
         processor.substituteTryBlockNodes(intoNode)
-
-        //processor.substituteLocalVarTable(intoNode);
+        processor.substituteLocalVarTable(intoNode);
     }
 
     protected abstract fun generateAssertFieldIfNeeded(info: RootInliningContext)
diff --git a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt
index 722472a11aa..3ee31e14a47 100644
--- a/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt
+++ b/compiler/ir/backend.jvm/src/org/jetbrains/kotlin/backend/jvm/codegen/ExpressionCodegen.kt
@@ -87,9 +87,27 @@ class TryWithFinallyInfo(val onExit: IrExpression) : TryInfo()
 class BlockInfo(val parent: BlockInfo? = null) {
     val variables = mutableListOf<VariableInfo>()
     val infos: Stack<ExpressionInfo> = parent?.infos ?: Stack()
+    var activeLocalGaps = 0
 
     fun hasFinallyBlocks(): Boolean = infos.firstIsInstanceOrNull<TryWithFinallyInfo>() != null
 
+    internal inline fun forEachBlockUntil(tryWithFinallyInfo: TryWithFinallyInfo, onBlock: BlockInfo.() -> Unit) {
+        var current: BlockInfo? = this
+        while (current != null && current != tryWithFinallyInfo.blockInfo) {
+            current.onBlock()
+            current = current.parent
+        }
+    }
+
+    internal inline fun localGapScope(tryWithFinallyInfo: TryWithFinallyInfo, block: () -> Unit) {
+        forEachBlockUntil(tryWithFinallyInfo) { ++activeLocalGaps }
+        try {
+            block()
+        } finally {
+            forEachBlockUntil(tryWithFinallyInfo) { --activeLocalGaps }
+        }
+    }
+
     internal inline fun <T : ExpressionInfo, R> withBlock(info: T, f: (T) -> R): R {
         info.blockInfo = this
         infos.add(info)
@@ -411,14 +429,15 @@ class ExpressionCodegen(
         gapStart: Label,
         restartLabel: Label
     ) {
-        var current: BlockInfo? = info
-        while (current != null && current != tryWithFinallyInfo.blockInfo) {
-            for (variable in current.variables) {
-                if (variable.declaration.isVisibleInLVT) {
-                    variable.gaps.add(Gap(gapStart, restartLabel))
+        info.forEachBlockUntil(tryWithFinallyInfo) {
+            // If we are already in a gap do not add a new one.
+            if (activeLocalGaps == 0) {
+                for (variable in variables) {
+                    if (variable.declaration.isVisibleInLVT) {
+                        variable.gaps.add(Gap(gapStart, restartLabel))
+                    }
                 }
             }
-            current = current.parent
         }
     }
 
@@ -1239,21 +1258,21 @@ class ExpressionCodegen(
         nestedTryWithoutFinally: MutableList<TryInfo> = arrayListOf()
     ) {
         val gapStart = markNewLinkedLabel()
-
-        finallyDepth++
-        if (isFinallyMarkerRequired()) {
-            generateFinallyMarker(mv, finallyDepth, true)
+        data.localGapScope(tryWithFinallyInfo) {
+            finallyDepth++
+            if (isFinallyMarkerRequired()) {
+                generateFinallyMarker(mv, finallyDepth, true)
+            }
+            tryWithFinallyInfo.onExit.accept(this, data).discard()
+            if (isFinallyMarkerRequired()) {
+                generateFinallyMarker(mv, finallyDepth, false)
+            }
+            finallyDepth--
+            if (tryCatchBlockEnd != null) {
+                tryWithFinallyInfo.onExit.markLineNumber(startOffset = false)
+                mv.goTo(tryCatchBlockEnd)
+            }
         }
-        tryWithFinallyInfo.onExit.accept(this, data).discard()
-        if (isFinallyMarkerRequired()) {
-            generateFinallyMarker(mv, finallyDepth, false)
-        }
-        finallyDepth--
-        if (tryCatchBlockEnd != null) {
-            tryWithFinallyInfo.onExit.markLineNumber(startOffset = false)
-            mv.goTo(tryCatchBlockEnd)
-        }
-
         // Split the local variables for the blocks on the way to the finally. Variables introduced in these blocks do not
         // cover the finally block code.
         val endOfFinallyCode = markNewLinkedLabel()
diff --git a/compiler/testData/debug/localVariables/tryFinally10.kt b/compiler/testData/debug/localVariables/tryFinally10.kt
new file mode 100644
index 00000000000..1642bb64e8d
--- /dev/null
+++ b/compiler/testData/debug/localVariables/tryFinally10.kt
@@ -0,0 +1,55 @@
+// FILE: test.kt
+
+inline fun f(block: () -> Unit) {
+    try {
+        val z = 32
+        for (j in 0 until 1) {
+            return
+        }
+    } finally {
+        block()
+    }
+}
+
+var x: String = ""
+
+fun compute(): String {
+    try {
+        val y = 42
+        for (i in 0 until 1) {
+            f {
+                return "NON_LOCAL_RETURN"
+            }
+        }
+    } finally {
+        val s2 = "OK"
+        x = s2  // TODO: Why is `s2` not visible here?
+    }
+    return "FAIL"
+}
+
+fun box() {
+    val result = compute()
+    val localX = x
+}
+
+// The local variables `y` and `i` are visible in the finally block with old backend.
+// IGNORE_BACKEND: JVM
+
+// LOCAL VARIABLES
+// test.kt:32 box:
+// test.kt:17 compute:
+// test.kt:18 compute:
+// test.kt:19 compute: y:int=42:int
+// test.kt:20 compute: y:int=42:int, i:int=0:int
+// test.kt:4 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int
+// test.kt:5 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int
+// test.kt:6 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int, z$iv:int=32:int
+// test.kt:7 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int, z$iv:int=32:int, j$iv:int=0:int
+// test.kt:10 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int
+// test.kt:21 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int, $i$a$-f-TestKt$compute$1:int=0:int
+// test.kt:25 compute:
+// test.kt:26 compute:
+// test.kt:32 box:
+// test.kt:33 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String
+// test.kt:34 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String, localX:java.lang.String="OK":java.lang.String
diff --git a/compiler/testData/debug/localVariables/tryFinally5.kt b/compiler/testData/debug/localVariables/tryFinally5.kt
index 5bd7503652a..b30b6bf458f 100644
--- a/compiler/testData/debug/localVariables/tryFinally5.kt
+++ b/compiler/testData/debug/localVariables/tryFinally5.kt
@@ -26,13 +26,9 @@ fun box() {
     val localX = x
 }
 
-// JVM_IR backend correctly gets rid of the `a` local in the finally, but the inliner
-// does not get rid of `b` or the inlining locals.
+// JVM backend has the `a` local covering the finally block. It shouldn't.
 
-// JVM backend does not get rid of `a` and also the inliner does not get rid of `b`
-// or the inlining locals.
-
-// IGNORE_BACKEND: JVM_IR, JVM
+// IGNORE_BACKEND: JVM
 
 // LOCAL VARIABLES
 // test.kt:25 box:
diff --git a/compiler/testData/debug/localVariables/tryFinally6.kt b/compiler/testData/debug/localVariables/tryFinally6.kt
new file mode 100644
index 00000000000..6af51b6a1c5
--- /dev/null
+++ b/compiler/testData/debug/localVariables/tryFinally6.kt
@@ -0,0 +1,64 @@
+// FILE: test.kt
+
+inline fun h(block: () -> Unit) {
+    try {
+        val hLocal = "hLocal"
+        block()
+    } finally {
+        val h = "h"
+    }
+}
+
+inline fun g(block: () -> Unit) {
+    try {
+        val gLocal = "gLocal"
+        h(block)
+    } finally {
+        val g = "g"
+    }
+}
+
+var x: String? = null
+
+fun compute(): String {
+    try {
+        for (a in listOf("a")) {
+            g {
+                for (b in listOf("b")) {
+                    return b
+                }
+            }
+        }
+    } finally {
+        x = "OK"
+    }
+    return "FAIL"
+}
+
+fun box() {
+    val result = compute()
+    val localX = x
+}
+
+// JVM backend has `a` visible in the `compute` finally block. It shouldn't be.
+// IGNORE_BACKEND: JVM
+
+// LOCAL VARIABLES
+// test.kt:39 box:
+// test.kt:24 compute:
+// test.kt:25 compute:
+// test.kt:26 compute: a:java.lang.String="a":java.lang.String
+// test.kt:13 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int
+// test.kt:14 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int
+// test.kt:15 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int, gLocal$iv:java.lang.String="gLocal":java.lang.String
+// test.kt:4 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int, gLocal$iv:java.lang.String="gLocal":java.lang.String, $i$f$h:int=0:int
+// test.kt:5 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int, gLocal$iv:java.lang.String="gLocal":java.lang.String, $i$f$h:int=0:int
+// test.kt:6 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int, gLocal$iv:java.lang.String="gLocal":java.lang.String, $i$f$h:int=0:int, hLocal$iv$iv:java.lang.String="hLocal":java.lang.String
+// test.kt:27 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int, gLocal$iv:java.lang.String="gLocal":java.lang.String, $i$f$h:int=0:int, hLocal$iv$iv:java.lang.String="hLocal":java.lang.String, $i$a$-g-TestKt$compute$1:int=0:int
+// test.kt:28 compute: a:java.lang.String="a":java.lang.String, $i$f$g:int=0:int, gLocal$iv:java.lang.String="gLocal":java.lang.String, $i$f$h:int=0:int, hLocal$iv$iv:java.lang.String="hLocal":java.lang.String, $i$a$-g-TestKt$compute$1:int=0:int, b:java.lang.String="b":java.lang.String
+// test.kt:8 compute: a:java.lang.String="a":java.lang.String
+// test.kt:17 compute: a:java.lang.String="a":java.lang.String
+// test.kt:33 compute:
+// test.kt:39 box:
+// test.kt:40 box: result:java.lang.String="b":java.lang.String
+// test.kt:41 box: result:java.lang.String="b":java.lang.String, localX:java.lang.String="OK":java.lang.String
diff --git a/compiler/testData/debug/localVariables/tryFinally7.kt b/compiler/testData/debug/localVariables/tryFinally7.kt
new file mode 100644
index 00000000000..b887318c03c
--- /dev/null
+++ b/compiler/testData/debug/localVariables/tryFinally7.kt
@@ -0,0 +1,51 @@
+// FILE: test.kt
+
+inline fun f(block: () -> Unit) {
+    block()
+}
+
+var x: String = ""
+
+fun compute(): String {
+    try {
+        val y = 42
+        for (i in 0 until 1) {
+            throw RuntimeException("$y $i")
+        }
+    } catch (e: Exception) {
+        val y = 32
+        for (j in 0 until 1) {
+            f {
+                return "NON_LOCAL_RETURN"
+            }
+        }
+    } finally {
+        x = "OK"
+    }
+    return "FAIL"
+}
+
+fun box() {
+    val result = compute()
+    val localX = x
+}
+
+// The old backend has `y` and `j` visible on the finally block.
+// IGNORE_BACKEND: JVM
+
+// LOCAL VARIABLES
+// test.kt:29 box:
+// test.kt:10 compute:
+// test.kt:11 compute:
+// test.kt:12 compute: y:int=42:int
+// test.kt:13 compute: y:int=42:int, i:int=0:int
+// test.kt:15 compute:
+// test.kt:16 compute: e:java.lang.Exception=java.lang.RuntimeException
+// test.kt:17 compute: e:java.lang.Exception=java.lang.RuntimeException, y:int=32:int
+// test.kt:18 compute: e:java.lang.Exception=java.lang.RuntimeException, y:int=32:int, j:int=0:int
+// test.kt:4 compute: e:java.lang.Exception=java.lang.RuntimeException, y:int=32:int, j:int=0:int, $i$f$f:int=0:int
+// test.kt:19 compute: e:java.lang.Exception=java.lang.RuntimeException, y:int=32:int, j:int=0:int, $i$f$f:int=0:int, $i$a$-f-TestKt$compute$1:int=0:int
+// test.kt:23 compute: e:java.lang.Exception=java.lang.RuntimeException
+// test.kt:29 box:
+// test.kt:30 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String
+// test.kt:31 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String, localX:java.lang.String="OK":java.lang.String
diff --git a/compiler/testData/debug/localVariables/tryFinally8.kt b/compiler/testData/debug/localVariables/tryFinally8.kt
new file mode 100644
index 00000000000..a34fc9bb6b2
--- /dev/null
+++ b/compiler/testData/debug/localVariables/tryFinally8.kt
@@ -0,0 +1,54 @@
+// FILE: test.kt
+
+inline fun f(block: () -> Unit) {
+    try {
+        val z = 32
+        for (j in 0 until 1) {
+            throw RuntimeException("$z $j")
+        }
+    } catch (e: Exception) {
+        block()
+    }
+}
+
+var x: String = ""
+
+fun compute(): String {
+    try {
+        val y = 42
+        for (i in 0 until 1) {
+            f {
+                return "NON_LOCAL_RETURN"
+            }
+        }
+    } finally {
+        x = "OK"
+    }
+    return "FAIL"
+}
+
+fun box() {
+    val result = compute()
+    val localX = x
+}
+
+// The old backend has `y` and `i` visible on the finally block.
+// IGNORE_BACKEND: JVM
+
+// LOCAL VARIABLES
+// test.kt:31 box:
+// test.kt:17 compute:
+// test.kt:18 compute:
+// test.kt:19 compute: y:int=42:int
+// test.kt:20 compute: y:int=42:int, i:int=0:int
+// test.kt:4 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int
+// test.kt:5 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int
+// test.kt:6 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int, z$iv:int=32:int
+// test.kt:7 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int, z$iv:int=32:int, j$iv:int=0:int
+// test.kt:9 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int
+// test.kt:10 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int, e$iv:java.lang.Exception=java.lang.RuntimeException
+// test.kt:21 compute: y:int=42:int, i:int=0:int, $i$f$f:int=0:int, e$iv:java.lang.Exception=java.lang.RuntimeException, $i$a$-f-TestKt$compute$1:int=0:int
+// test.kt:25 compute:
+// test.kt:31 box:
+// test.kt:32 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String
+// test.kt:33 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String, localX:java.lang.String="OK":java.lang.String
diff --git a/compiler/testData/debug/localVariables/tryFinally9.kt b/compiler/testData/debug/localVariables/tryFinally9.kt
new file mode 100644
index 00000000000..ae6bf6fddb2
--- /dev/null
+++ b/compiler/testData/debug/localVariables/tryFinally9.kt
@@ -0,0 +1,54 @@
+// FILE: test.kt
+
+inline fun f(block: () -> Unit) {
+    block()
+}
+
+var x: String = ""
+
+fun compute(): String {
+    try {
+        try {
+            val y = 42
+            for (i in 0 until 1) {
+                return "NORMAL_RETURN"
+            }
+        } finally {
+            var s = "NOPE"
+            x = s
+            f {
+                return "NON_LOCAL_RETURN"
+            }
+        }
+    } finally {
+        val s2 = "OK"
+        x = s2  // TODO: Why is `s2` not visible here?
+    }
+    return "FAIL"
+}
+
+fun box() {
+    val result = compute()
+    val localX = x
+}
+
+// The local variables in the try and finally blocks are not removed for the finally block with the old backend.
+// IGNORE_BACKEND: JVM
+
+// LOCAL VARIABLES
+// test.kt:31 box:
+// test.kt:10 compute:
+// test.kt:11 compute:
+// test.kt:12 compute:
+// test.kt:13 compute: y:int=42:int
+// test.kt:14 compute: y:int=42:int, i:int=0:int
+// test.kt:17 compute:
+// test.kt:18 compute: s:java.lang.String="NOPE":java.lang.String
+// test.kt:19 compute: s:java.lang.String="NOPE":java.lang.String
+// test.kt:4 compute: s:java.lang.String="NOPE":java.lang.String, $i$f$f:int=0:int
+// test.kt:20 compute: s:java.lang.String="NOPE":java.lang.String, $i$f$f:int=0:int, $i$a$-f-TestKt$compute$1:int=0:int
+// test.kt:24 compute:
+// test.kt:25 compute:
+// test.kt:31 box:
+// test.kt:32 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String
+// test.kt:33 box: result:java.lang.String="NON_LOCAL_RETURN":java.lang.String, localX:java.lang.String="OK":java.lang.String
diff --git a/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/IrLocalVariableTestGenerated.java b/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/IrLocalVariableTestGenerated.java
index 7b981161b68..f4e9de550c8 100644
--- a/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/IrLocalVariableTestGenerated.java
+++ b/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/IrLocalVariableTestGenerated.java
@@ -92,6 +92,12 @@ public class IrLocalVariableTestGenerated extends AbstractIrLocalVariableTest {
         runTest("compiler/testData/debug/localVariables/tryFinally.kt");
     }
 
+    @Test
+    @TestMetadata("tryFinally10.kt")
+    public void testTryFinally10() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally10.kt");
+    }
+
     @Test
     @TestMetadata("tryFinally2.kt")
     public void testTryFinally2() throws Exception {
@@ -116,6 +122,30 @@ public class IrLocalVariableTestGenerated extends AbstractIrLocalVariableTest {
         runTest("compiler/testData/debug/localVariables/tryFinally5.kt");
     }
 
+    @Test
+    @TestMetadata("tryFinally6.kt")
+    public void testTryFinally6() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally6.kt");
+    }
+
+    @Test
+    @TestMetadata("tryFinally7.kt")
+    public void testTryFinally7() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally7.kt");
+    }
+
+    @Test
+    @TestMetadata("tryFinally8.kt")
+    public void testTryFinally8() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally8.kt");
+    }
+
+    @Test
+    @TestMetadata("tryFinally9.kt")
+    public void testTryFinally9() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally9.kt");
+    }
+
     @Test
     @TestMetadata("underscoreNames.kt")
     public void testUnderscoreNames() throws Exception {
diff --git a/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/LocalVariableTestGenerated.java b/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/LocalVariableTestGenerated.java
index 0c84a8ea521..2e2010a460b 100644
--- a/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/LocalVariableTestGenerated.java
+++ b/compiler/tests-gen/org/jetbrains/kotlin/codegen/debugInformation/LocalVariableTestGenerated.java
@@ -92,6 +92,12 @@ public class LocalVariableTestGenerated extends AbstractLocalVariableTest {
         runTest("compiler/testData/debug/localVariables/tryFinally.kt");
     }
 
+    @Test
+    @TestMetadata("tryFinally10.kt")
+    public void testTryFinally10() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally10.kt");
+    }
+
     @Test
     @TestMetadata("tryFinally2.kt")
     public void testTryFinally2() throws Exception {
@@ -116,6 +122,30 @@ public class LocalVariableTestGenerated extends AbstractLocalVariableTest {
         runTest("compiler/testData/debug/localVariables/tryFinally5.kt");
     }
 
+    @Test
+    @TestMetadata("tryFinally6.kt")
+    public void testTryFinally6() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally6.kt");
+    }
+
+    @Test
+    @TestMetadata("tryFinally7.kt")
+    public void testTryFinally7() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally7.kt");
+    }
+
+    @Test
+    @TestMetadata("tryFinally8.kt")
+    public void testTryFinally8() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally8.kt");
+    }
+
+    @Test
+    @TestMetadata("tryFinally9.kt")
+    public void testTryFinally9() throws Exception {
+        runTest("compiler/testData/debug/localVariables/tryFinally9.kt");
+    }
+
     @Test
     @TestMetadata("underscoreNames.kt")
     public void testUnderscoreNames() throws Exception {