Gary Heynes, private client group partner at Baker Tilly, said this year’s Finance Bill contains proposals which “change significantly” the basic concept of IHT only being charged on the net estate – i.e. the total assets less any debt.
The tax expert explained changes to the deductibility of debts mean outstanding loans will not be deductible in three situations where money borrowed is either invested in assets for which IHT relief is given, invested in assets excluded from IHT or not repaid by the Executors. Heynes said this will catch innocent situations such as:
1. An individual borrowing money against their home to invest in their business, rather than taking a bank business loan which may be more costly or more difficult to obtain. As most trading businesses will qualify for Business Property Relief, giving 100% relief from IHT, the full value of the house will remain chargeable to IHT. Only if the debt is greater than the value of the business will any relief be given for the borrowing.
2. If a non-UK domiciled individual borrows money against UK property and simply takes the money outside of the UK, say, to buy an overseas property, relief for the loan against the UK property could be denied because the overseas assets are excluded from IHT. Non-doms are only subject to IHT on UK assets for the first 17 years of UK residence, with foreign assets being excluded from charge. However, it is often easier to arrange borrowing in the UK and many non-UK domiciled individuals will be caught by this change.
3. If someone makes a loan to an elderly parent or other relative who dies, it will be necessary for the loan to be repaid before it is allowable as a debt against the deceased’s estate. Often in family arrangements, loans are written-off on death but, if that is done under the new rules, no deduction will be given in the IHT calculation for the amount the elderly relative had owed.
Heynes points out that the rules have a retrospective effect, so arrangements already in place will be caught and the new rules will be applied to deaths which happen after the Finance Bill becomes law – just before Parliament breaks for the summer.
