Budget announcement - Inheritance tax: limiting deduction for liabilities
Finance Bill 2013 will introduce limitations and restrictions on the ability to deduct debts and liabilities from a person's estate when calculating the value transferred on deaths and chargeable lifetime transfers occurring after Royal Assent, to ensure that liabilities will only be deductible where the creditor is actually going to be repaid. Commercial debts and liabilities that are not repaid for a commercial reason will be unaffected.
This measure is targeted at schemes creating liabilities where the creditor is never repaid and loans to acquire assets that benefit from inheritance tax (IHT) reliefs (such as business property relief (BPR), agricultural property relief (APR) and woodlands relief) and property outside the scope of IHT (such as excluded property owned by non-UK domiciled individuals), so that loans made to acquire excluded property will no longer be allowed as a deduction.
The new rules will also cover deductions for liabilities in relation to settled property although the restrictions on unpaid debts will not apply to the calculation of ten year charges.
IMPACT ON DE-ENVELOPING
Although this measure is targeted at specific schemes it could have a wider impact on vanilla IHT planning. For example, individuals wanting to liquidate corporate vehicles holding high value residential property in favour of direct ownership to avoid the extended scope of capital gains tax and the ATED (annual tax on enveloped dwellings (formerly referred to as "ARPT")) have been considering the reduction of IHT exposure through associated debt. The proposed restrictions and conditions may make this harder.
Because we will not see the detail until the Finance Bill is published next, it may be worth considering putting on hold any planned liquidation of the current corporate holder in a property structure until the detailed legislation becomes available. Although the price for delay will be a proportionate charge to ATED, it will provide an opportunity for further consideration as to whether the benefits of a corporate structure still outweigh the future cost of the ATED and liquidation in favour of direct personal ownership.
This is an outline of complicated draft and proposed legislation, the details of which are not yet known in their entirety. This memorandum does not constitute or contain legal advice.
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