IHT Business Property Relief and loans

15/07/2013

A good bit of tax planning has always been to maximise business property relief (BPR) for inheritance tax purposes (IHT) by borrowing against a fully chargeable asset, eg a private residence and using the cash to purchase property qualifying for BPR. Therefore the value of the non-qualifying property is reduced for IHT purposes reducing the IHT payable.

An attempt to reduce the IHT taxable value of an individual’s family home might then look like this:

                                                                               £

            Family home (liable to IHT)                      400,000         (market value)

            less: loan secured on home                    (300,000)

            Value for IHT purposes                              100,000

The £300,000 is used to acquire an asset (e.g. shares in a trading company) that will qualify for BPR:

                                                                               £

            BPR qualifying asset                               300,000

            Less BPR at 100%                                 (300,000)

            Value for IHT purposes                                nil

So the individual has £700,000 of gross assets, less a £300,000 debt and net assets of £400,000 – but an IHT transfer value of only £100,000. 

However, this will no longer work. HMRC have introduced measures in the FA 2013 to curtail all loan-based IHT-reduction arrangements.  Under the new rules, which will apply to any loan taken out on or after 6 April 2013, the loan will have to be first matched with the asset that was actually purchased with the loan – where that asset is relevant business property or agricultural property.  This means that reduction in value for IHT will be applied to an asset that is already relieved from IHT.  The above example would look quite different if the loan were taken out post-5 April 2013:

                                                                             £

            Family home (liable to IHT)                   400,000            (market value)

            less: loan secured on home                            (0)           the loan is matched to the shares

            Value for IHT purposes                           400,000

The £300,000 is used to acquire an asset that will qualify for BPR:

                                                                               £

            BPR qualifying asset                             300,000

            less: loan                                                (300,000)       

            Value for IHT purposes                               nil

            BPR claimable                                             nil

Here the individual has £700,000 of gross assets, less a £300,000 debt and net assets of £400,000 – with an IHT transfer value of £400,000, the BPR is effectively wasted.

 

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Francis Clark Chartered Accountants | Devon, Cornwall, Somerset, Wiltshire