New tax legislation has been introduced in the UK to restrict the use of certain types of debts for inheritance tax (IHT) purposes. The changes will be of particular interest to banks, trustees and all those who advise in relation to IHT.
The restriction on the use of debts may apply in 3 different circumstances for chargeable IHT events on or after 17 July 2013.
Firstly, borrowed money used to acquire, maintain or enhance assets that fall outside the UK estate of a non-UK domiciled person because they are excluded property will not be allowed to reduce the value of the UK estate. Borrowing money in the UK to acquire overseas property is an obvious target for the new restriction and funding arrangements will now need to be reviewed carefully. The new restriction will also apply to trusts that borrow money which could otherwise reduce the value of 10 year anniversary charges.
The second area of restriction is where the borrowed money is used to acquire, maintain or enhance assets that qualify for Business Property Relief, Agricultural Property Relief or Woodlands Relief and do not attract a charge to IHT. The restriction operates by treating the borrowed money as reducing the value of the assets that already qualify for one of the reliefs, even if the borrowing is secured against an asset that doesn’t qualify for relief, for example property.
The final restriction applies where a liability is not repaid on death unless there is a solid commercial reason for this. In the past, many people have taken loans from Employee Benefit Trusts in the knowledge that a post death write off of the loan by the trustees will not result in an income tax charge. This was also efficient for IHT as there was a debt in the estate. However, this may be the kind of arrangement that could be caught by the new rules.
The new rules are likely to have a major impact on IHT and succession planning and will become a key consideration for all involved in this area. Please contact us if you would like to discuss this area in more detail.