The Budget Statement in March 2013 included unexpected Inheritance Tax (IHT) changes which are likely to catch out a large number of business owners, entrepreneurs and farmers when they come into force after the Finance Bill receives Royal Assent in July 2013.
Alistair Millar, solicitor at Tallents in Southwell comments:
Under current legislation, it is perfectly legal for business owners to take out a loan against their property or other personal assets, and use that money to purchase an asset that may already attract another form of IHT, such as Business Property Relief, Agricultural Property Relief or Woodland Relief.
The government’s proposed rule changes are designed to close this loophole and clamp down on arrangements that try to take advantage of the current treatment of liabilities to legitimately reduce IHT.
Currently IHT is chargeable on a deceased individual’s net estate, i.e. the total value of all assets, less liabilities owed by the estate at the time of death. Liabilities may also include mortgages and loans.
However, the changes proposed by the Finance Bill mean that certain mortgages or loans may not be deductible in future for IHT calculation purposes and, more worryingly, these changes may apply to all existing loans, not only loans taken out going forward of the Finance Bill receiving Royal Asset in July 2013.
As a result, anyone who has mortgaged their home, or other personal assets to raise money to buy business assets, will result in their estate paying more IHT on death. So it is vital that legal advice is sought as soon as possible to understand the potential IHT liability being faced by the client.
The proposed new changes may also catch many existing business or farming funding situations and even ordinary family or commercial arrangements.
Although the proposed changes are not yet law, this is a complicated area to fully understand. Therefore we would urge any business owner or farmer who has mortgaged their home to purchase business assets or invest in their business, to meet with their solicitor and review their estate planning to see if any restructuring needs to take place.