An unusual title for this post, but I'm hoping you'll understand the connection by the end of it! One of the lesser covered elements arising out of this years budget was the unheralded Inheritance Tax (IHT) anti-avoidance legislation that was brought in under the radar. It has been some time since we have seen such wide ranging proposals hidden under the plethora of briefing notes released by the Treasury and HM Revenue & Customs, a move more reminiscent of the current chancellor's predecessors.
The particular measures that I am referring to relate to the offsetting of borrowing/debt against ones estate for the purposes of IHT. It has long stood that if one has an outstanding debt upon death that this is deductible from your estate before arriving at the sum which is ultimately chargeable to IHT at the death rate of 40%. The proposed changes turn this long standing pillar of IHT planning on its head, by disregarding certain borrowings. If the rules are enacted as planned, the estate's outstanding loans will not be deductible in three particular situations. These are:
- where money borrowed is either invested in assets for which IHT relief is given,
- invested in assets excluded from IHT, or
- where the loan is not repaid by the executors.
However, it is clear that is will potentially catch many more normal arrangements, such as someone borrowing funds against their main residence to invest in their business. In theory they have borrowed funds against a taxable asset (their residence) and invested it into an asset benefiting from an IHT relief. If this is indeed the case, and it is not cleared up by later guidance, then a lot of fledgling businesses will stand to be affected.
Another example is where an elderly testator receives a loan from a family member. Often such loans are written off on death, but under the new rules the executors will have to pay off the loan to make it allowable as a debt against the deceased’s estate. Alternatively, where a trust was established under that testators death, and the assets (usually the house) are then loaned to his surviving spouse with an appropriate loan agreement in place. In practice these loans are not repaid as the beneficiaries to the spouse's Will are usually the same as the trust and so the assets devolve to the same people, and the loan is subsequently cancelled out.
I think this will certainly make the IHT landscape interesting for a while yet in regard to Business Property and Agricultural Property Relief, and we will have to look at how the issue develops. However, we could be looking at a situation where business owners are having to budget for unexpected IHT bills as a result of these moves, despite only having entered into the arrangements for purely commercial purposes. Ultimately this sees the continuation of HMRC's "tuna-net" approach to tax avoidance, meaning that not only are the tuna caught, but everything else that swims in the tax ocean too!
