Next month, when the Finance Act receives Royal Assent, an additional Inheritance Tax (IHT) charge will also come into force that will broadly restrict relief on debts in certain circumstances when a liability to IHT arises.
Says Susie Swift, Partner in the Saffery Champness Landed Estates and Rural Business Group based in the firm’s Inverness office:
This has come as a curved ball from HMRC. There was no warning or consultation on this new restriction so we should assume it is a ‘done deal’ and that there is little room for any negotiation on it.
Following lobbying, it has just been announced that an amendment will be tabled so that the new restrictions will only apply to loans taken out on or after 6 April 2013. It is hoped that this will alleviate the position for individuals with arrangements in place before that date.
Where this change will affect the rural sector particularly is in removing the opportunity where funds borrowed could be invested in assets for which IHT relief is already given such as Agricultural Property Relief (APR) or Business Property Relief (BPR). Susie Swift says:
Before this change, debts could generally be matched with the asset on which they were secured. So, for example,funds borrowed could be secured on let cottages and then used to finance the family farming business. The debt would reduce the value of the let cottages for IHT purposes, whilst the farming business would secure APR and possibly BPR also, taking it out of the charge to IHT. This type of arrangement will no longer be available, and the full value of the let cottages will remain chargeable as the debt will be matched with the farming business assets first.
Another example is where an elderly family member receives a loan from another family member. Susie Swift says:
Previously, these types of family loan arrangements may well have been written off on death, but under the new rules the debt will not be deductible for IHT purposes unless the executors actually repay it in full.