Budget puts stopper on deductible-loan IHT planning
21 March 2013
Yesterday's Budget Statement announced
legislation to block inheritance tax (IHT) mitigation schemes that
rely on deductions for liabilities owed by the deceased.
The current rules allow executors to deduct
from the taxable estate any debts owed by the deceased at death,
whether or not the liabilities are paid after death and regardless
of how the borrowed funds have been used.
According to HMRC, this has been exploited by
avoidance schemes involving contrived debts that are never repaid,
so there is no real reduction in the value of the estate. The use
of loans to acquire non-taxable assets reduces the value of the
estate even more.
Prudential's Gerry Brown TEP cites an example
of a scheme in which a person sells an asset to his wife in return
for her IOU. When she dies the IOU is deducted from her estate even
though the husband never intended to recover the ‘debt’.
In future, where debts are not repaid on
death, the executors will have to demonstrate a commercial reason
for retaining the debt, not simply a desire to obtain a tax
advantage. If they cannot, HMRC will not allow the debt to be
deducted from the estate for IHT purposes.
The new legislation will also target schemes
in which the deceased took out loans to buy property that is either
exempt from IHT or for which IHT relief can be claimed. This could
be so-called ‘excluded property’ sited outside the UK and owned by
a non-dom; or business property such as shares in trading
companies, or agricultural land.
Such debts will in future not be allowable
against other non-relievable or relevant property. Instead the debt
will usually be taken to reduce the value of those assets. However
the deduction may be allowed if the acquired property has already
been disposed of or where the liability is greater than the
property value.
The new rules will also apply to trusts,
except that the unpaid liabilities rule will not apply when
calculating the estate's value for the purposes of the ten-year
anniversary charge.
According to Sophie Dworetzsky of tax advisors
Withers, this rule may have significant consequences for many
individuals. Existing IHT planning arrangements will have to be
reviewed to ensure that they are still effective, she said.
‘Much IHT planning will now need to be
revisited’, added tax advisors BKL. "Coupled with the fixing of the
nil-rate band at GBP325,000 until 2018, IHT is becoming a problem
for more and more people.’
No consultation has taken place on the new
measure, which could affect some hundreds of estates. There are
concerns that the measure will cast too wide a net. Stephen Barratt
TEP at accountancy firm James Cowper said farming estates could be
particularly vulnerable to the effect of these changes.
The full details will become clear when the
Finance Bill is published on 28 March. The measures will take
effect when the Finance Bill receives royal assent.
Sources
HMRC (Overview
of budget measures as PDF file)
UK Parliament (Budget statement)
Withers
Citywire
IFA Online
Farming UK