As a general rule, Inheritance Tax (IHT) is payable on the net value of assets. In other words, debts are generally deductible when calculating what a person is worth for IHT purposes on death. However, the Finance Act 2013 introduced limitations on the deductibility of certain debts. Judging from a few cases that have come to my attention recently, business owners still remain blissfully unaware of the impact of these changes on them. Time for a quick reminder, then.
Thanks to a new section 162B IHTA 1984, inserted by the Finance Act 2013, taking out a new loan to finance, either directly or indirectly, the purchase of assets that qualify for IHT business property relief, agricultural property relief or woodland relief is no longer such an attractive IHT planning technique. Loans to maintain or enhance previously acquired relievable assets are also caught.
Prior to 6 April 2013, such loans were a rather smart IHT saving trick. The assets purchased by the loan would attract IHT relief in full or part, depending upon their nature, after the two year minimum ownership period was satisfied. As long as the loan was not secured on the relievable assets, the loan could offset the IHT taxable value of non relievable assets, such as the business owner’s home.
Run the same scenario on 6 April 2013 or later and the effect of section 162B is to offset the loan against the market value of the relievable assets first, no matter what asset it is actually secured upon. Only if the loan exceeds the market value of the relievable assets will the balance be available to offset the value of the asset on which it is actually secured.
However, the changes only apply to loans incurred on or after 6 April 2013. So, family business owners with pre-6 April 2013 loans that have used them to finance their company’s activities, for example, should think very carefully before upsetting the status quo. If the loan is repaid and a fresh loan taken out, the new loan will fall under the new rules, which will be less IHT advantageous. If possible, pre-6 April 2013 loans should be renegotiated in order to maximise the likelihood that the renegotiated loan will not be treated as a new loan.