Inheritance Tax – don’t moan, it’s a loan!

Don’t moan, it’s a loan!

One of the anti-avoidance measures announced today impacts upon Inheritance Tax (IHT) schemes which have been marketed by certain promoters. It is anticipated that this will save £5m of IHT in 2013/14, increasing to £20m in 2014/15, although it is difficult to ascertain how these figures have been arrived at.

The IHT measures, as announced, will seek to deny a deduction for a loan in a person’s chargeable estate for IHT purposes. The particular circumstances where relief will be denied involve a situation where the loan was originally created artificially in order to gain a tax advantage. This may include loan arrangements to acquire assets which qualify for IHT relief or contrived situations with family members or trust schemes. This will include double trust schemes involving the family home which were particularly popular a few years ago. Some arrangements have been put in place where the loan is never actually repaid.

Take this simple example:

During husband’s lifetime, he sells an asset to his wife and receives an IOU in satisfaction. At a later date, he gifts the IOU to their son and survives seven years so that the gift is outside of his estate. When the wife dies the IOU is settled out of her estate thereby reducing the actual amount chargeable to IHT. During their lifetime they continue to enjoy use of the asset as a married couple and although the debt was nothing more than a paper exercise, it is clear that they gained a distinct tax advantage.

IHT reliefs

Investment in certain types of asset attracts generous reliefs for IHT purposes. In particular, 100% relief is available for assets which qualify for Business Property Relief (BPR), which includes unquoted trading company shares, once they have been held for two years. The definition of unquoted trading company shares for this purpose includes shares listed on AIM. There are also generous IHT reliefs for Agricultural Property (APR) and Woodlands (WR).

Whilst it is entirely legitimate planning to invest in BPR portfolios, promoters of tax avoidance schemes have been using loan arrangements to effectively double the IHT savings by investment in BPR qualifying assets and in addition securing a deduction against the deceased’s estate. This can work whereby the loan is used to invest in BPR assets.

When will the measures come into force?

Legislation will be introduced in Finance Bill 2013 and will be effective for deaths or chargeable transfers made after the date of Royal Assent (which is anticipated to be sometime in July). We will be able to provide further analysis once the detail of the legislation is known. However, the provisions are intended to have the following impact:

• A deduction for IHT purposes will only be available to the extent that a loan is actually repaid;
• A deduction for IHT purposes will not be allowed to the extent that a loan has been used directly or indirectly to acquire property excluded from the charge to IHT. This is unless the property has been disposed of or the loan is greater than the value of the excluded property;
• Where a loan has been taken to acquire assets which qualify for BPR, APR or WR, the loan will reduce the value of the assets that can qualify for the relief. The deduction for the loan will be matched against the assets acquired and relief will be restricted to the net value of the assets. Any excess liability will be allowable as a deduction, subject to it being repaid.

It is important to note that the reliefs themselves remain untouched and are very valuable. It is the legislation concerning the deductibility of the loans which is being changed.

Should you think you may be affected by the proposals then please contact us.