IHT Rules Change Surrounding Deduction of Debts

To combat tax avoidance, Finance Act 2013 brought about a number of changes to the rules surrounding the deduction of debts when calculating inheritance tax (IHT). In many cases, the changes increase the IHT payable.

The rules apply to outstanding loans that were used to finance ‘relievable property’ (a business or agricultural investment) or ‘excluded (non-UK) property’, affecting the value of the taxable estate, the value of taxable gifts and the amount of tax payable by trustees.

Liabilities (such as loans and mortgages) reduce the value of a property and therefore reduce its IHT charge. But since business and agricultural assets also qualify for ‘business property relief’ (effectively eliminating their IHT charge) a further deduction is regarded by the Government as a ‘double dip’. From now on, loans will be deducted before other reliefs, which may increase the IHT payable on securities.

As well as this, loans left outstanding indefinitely will be scrutinised to make sure that there is a ‘real commercial reason’ for the debt and that it is not being maintained for tax purposes. This change particularly targets individuals that borrow from family companies or trusts.

If you are concerned by these changes or the way they will affect your estate, contact us to arrange a free, no obligation consultation.

Comments are closed.