Personal Solicitors Suffolk – Inheritance tax blow for business

James Skellorn

‘Once again the Chancellor has hidden in the small print of the Budget a tax blow for people who run businesses.  It is about whether a debt you owe on your death reduces the value of your estate for inheritance tax.

The position used to be simple.  Tax was payable on the net value of the estate: that is, the value of everything you own on death, less debts that you owe.   The new rule proposed in the Budget is that if you borrow money to invest in your business and secure it on assets that you do not get relief from inheritance tax (for example your house or an investment property), then the loan does not reduce the value of your estate for inheritance tax if business assets in which the proceeds of the loan have been invested qualify for exemption from tax (either a business property or agricultural property).

It is true tax advisers have been advising for years on the inheritance tax benefit of securing business loans on assets which do not get relief from tax.  This is not straightforward to achieve in practise. Commercial considerations and the bank requirements may not give a choice as to what security has to be given.  Assuming the rules are changed in the Finance Act, there is no longer a tax advantage to be gained.  The new rules will undoubtedly lead to rough justice in some cases, and offer no encouragement to people who run businesses to borrow money to develop and invest in them.

A further rule change is that a debt of the estate is not deductible for inheritance tax purposes if the debt is not repaid in the winding up of the estate.  This is relevant to cases where a child lends money to a parent to help them when they are in financial hardship.  Commonly the debt is not repaid when the parent dies, it is simply allowed for in the distribution of the estate.  Now, for the debt to reduce the estate for tax purposes, it looks as though it will have to be repaid to the child, adding an extra complication to winding up the estate.

Often in the past, changes to inheritance tax rules are made only after consultation with tax advisers, to consider carefully the impact of the proposed changes, and modify them as necessary.  It is notable that there has been no consultation on these changes:  they have simply been announced and will have retrospective effect on existing tax planning.

All this means more traps for the unwary, and a need to take good advice to minimise tax.’

James Skellorn is a personal solicitor at Barker Gotelee, solicitors in Suffolk

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