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22nd March 2013

Inheritance Tax: limiting the deduction for liabilities

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The Government’s recent Budget announced new anti avoidance measures which will affect the inheritance tax (IHT) treatment of liabilities to reduce the value of an estate.

Current law

IHT is normally charged on the net value of a deceased person’s estate after taking into account liabilities outstanding at the date of death, and after deducting any reliefs, exemptions and the nil-rate band. The deduction is given for the full value of the debts due to the deceased’s creditors, and not for the amount actually paid to them.

Certain assets are eligible for reliefs such as business property relief and agricultural property relief so they are not chargeable to IHT.

Proposed revisions

New legislation will bring in conditions and restrictions in the way that the deduction for liabilities is allowed in the following circumstances:

  • A deduction for a liability will only be allowed to the extent that it is repaid to the creditor, unless it is shown that there is a commercial reason for not repaying the liability and it is not left unpaid as part of arrangements to get a tax advantage
  • No deduction will be allowed for a liability to the extent that it has been incurred directly or indirectly to acquire property which is excluded from the charge to IHT.
  • Loans used to acquire assets on which a relief such as BPR or APR is due, will be taken to reduce the value of those assets that can qualify for relief before the relief is applied. The deduction for the liability 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 against the estate in general subject to the new rule about unpaid debts.

All individuals and trustees who have entered into IHT planning involving the deduction of liabilities from the value of property may be affected and may see an increase in their IHT liabilities, although the rule will not apply to the calculation of the ten year anniversary charge for settlements.

The changes will have effect for deaths and chargeable transfers on or after the date that Finance Bill 2013 receives Royal Assent.

If you wish to discuss this further please contact Kelly Hardcastle on 01223 532722 or click here to email Kelly.