As a general rule, Inheritance Tax
(IHT) is payable on the net value of
assets. In other words, debts are generally
deductible when calculating what a person is worth for IHT purposes on
death. However, the Finance Act 2013
introduced limitations on the deductibility of certain debts. Judging from a few cases that have come to my
attention recently, business owners still remain blissfully unaware of the
impact of these changes on them. Time
for a quick reminder, then.
Thanks to a new section 162B IHTA
1984, inserted by the Finance Act 2013, taking out a new loan to finance,
either directly or indirectly, the purchase of assets that qualify for IHT
business property relief, agricultural property relief or woodland relief is no
longer such an attractive IHT planning technique. Loans to maintain or enhance previously
acquired relievable assets are also caught.
Prior to 6 April 2013, such loans
were a rather smart IHT saving trick.
The assets purchased by the loan would attract IHT relief in full or
part, depending upon their nature, after the two year minimum ownership period
was satisfied. As long as the loan was
not secured on the relievable assets, the loan could offset the IHT taxable
value of non relievable assets, such as the
business owner’s home.
Run the same scenario on 6 April
2013 or later and the effect of section 162B is to offset the loan against
the market value of the relievable assets first, no matter what asset it is
actually secured upon. Only if the loan
exceeds the market value of the relievable assets will the balance be available
to offset the value of the asset on which it is actually secured.
However, the changes only apply to loans
incurred on or after 6 April 2013. So, family
business owners with pre-6 April 2013 loans that have used them to finance
their company’s activities, for example, should think very carefully before
upsetting the status quo. If the loan is
repaid and a fresh loan taken out, the new loan will fall under the new rules,
which will be less IHT advantageous. If
possible, pre-6 April 2013 loans should be renegotiated in order to maximise
the likelihood that the renegotiated loan will not be treated as a new loan.
