In the April 2013 Finance Bill, the idea of inheritance tax being charged on the net estate (i.e. total assets less any debts, such as mortgages or loans) is being set aside in three particular situations. The thought behind the proposal is to reduce the amount of inheritance tax relief available to an estate in certain circumstances.
The detailed provisions are set out in Clause 174 of the Finance Bill 2013 and the explanatory notes provided by HMRC show that they will investigate the following cases:
1. Where the money borrowed is invested in assets for which inheritance tax relief is given – e.g. assets which attract Business Property Relief, Agricultural Property Relief, Woodlands relief, or arrangements such as Employee Benefit Trusts;
2. Where the money borrowed is invested in assets excluded from inheritance tax – e.g. property outside the UK settled by a non UK domiciled person;
3. Where the loan is not repaid by the Executors.
In these cases, HMRC are aiming to remove the inheritance tax advantage that can arise and the debts will no longer be deductible against the estate. Schemes set up to specifically take advantage of the potential double relief (i.e.1. the deduction from the taxable estate of the original debt, and 2. the relief from Inheritance tax of the qualifying assets purchased with the funds raised by the debt) will need to be reviewed.
If the rules are enacted as proposed, the effect will result in more inheritance tax being paid by some estates, even in cases where there was no intention to mitigate inheritance tax. For example, this means for people who have genuinely created a debt by raising a mortgage against their home to fund their family business may have to think about the tax consequences and how this will impact on their family and business and whether there will be sufficient funds to pay the additional inheritance tax, if these provisions take effect.
If you think any of the above circumstances apply to you and would like further estate planning advice, please contact our Wills and Wealth planning team 01625 442148.