Business Solicitors Suffolk – new rules on which personal loans can be deducted for inheritance tax

Nick Palmer

‘When you die, inheritance tax (IHT) is charged on your estate.

If you own a business, in principle the value of your business and assets used in that business may qualify for up to 100% relief from IHT. As you would expect, there are conditions and limitations before relief will be granted but nevertheless this is a tremendously valuable relief that can provide further tax saving opportunities for you and your family.

If your business has borrowed money, that liability reduces the value of your business and so will not reduce the amount of IHT charged on your non-business assets.

On the other hand, personal borrowing does reduce the value of your non-business assets and therefore reduces the IHT liability. This has provided tax planning opportunities for business owners. For example:

John owns a company and borrowed £50,000 to be used in his company. John decided to borrow this money personally and charged this on his home. When John dies:

  • There is no IHT payable on the value of John’s company shares; and
  • The value of John’s home will be reduced by £50,000 before IHT is charged, thus saving £20,000 tax.

However…in his Budget earlier this year, the Chancellor introduced rules to stop this and HMRC has just published its guidance.

Broadly, if you:

  • borrow money after 6 April 2013 personally rather than through your business; and
  • use that money to acquire, maintain or enhance business assets;

then this personal loan will no longer reduce the IHT on your non-business assets.

In the above example, if John borrowed £50,000 now, this would not reduce the value of his home, even though it is secured against this. The IHT payable on his death would therefore increase by £20,000.

John’s example is a simple one. Real-life examples are rarely so straightforward:

  • there may be little or no evidence as to what any borrowing has been used for, particularly for sole traders;
  • the borrowing may be used to buy a mixture of business and non-business assets; and
  • business assets may be sold and replaced, or given away as part of succession planning.

The legislation answers some of these points, but it will take time for HMRC to establish a settled approach on the grey areas and the quality of evidence it will require before granting IHT relief on personal loans to business owners.’

Nick Palmer is a solicitor specialising in Wills, trusts and tax at Barker Gotelee Solicitors

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