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Hazlewoods Agriculture team update - Inheritance Tax changes on debt relief

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8 July 2013
Previously, where an individual has borrowed money which will still be outstanding on death, it has been Inheritance Tax (IHT) efficient to secure the debt against property which does not qualify for Agricultural Property Relief (APR) or Business Property Relief (BPR), regardless of the use of the funds. Such an asset would normally be residential property that is not a farmhouse.
 
Future position
 
We highlighted in the Hazlewoods Agricultural Focus Summer edition recently issued, that the 2013 Budget had announced that this deduction will be restricted following Royal Assent of the 2013 Finance Bill, which is likely to be in July. The changes will apply to all deaths after that date, and likely to mean an increase in IHT liabilities.
 
The new rules had originally stated that where an individual has a liability outstanding at the date of death, to the extent that the funds have been used to acquire, maintain or enhance the value of property qualifying for APR or BPR or woodland, for which there are special IHT reliefs, the liability will first be deducted from the value of those assets and not the property on which it is secured. As the debt is reducing the value of assets on which IHT was not due because of the reliefs available, the estate will now potentially pay additional IHT.
 
Revised changes announced
 
It has recently been announced that the restriction regarding what assets borrowings incurred can be set against when calculating an IHT liability, will now only apply to new debts incurred after 5 April 2013. However, it is likely that refinancing or rearranging a debt after 5 April 2013, where the debt was originally incurred before 5 April 2013, will also fall under the new treatment.
 
Going forward
 
Although the amendment to the changes means that individuals will still be able to obtain the most tax efficient treatment for debts incurred before 5 April 2013, they will need to be aware of the restricted relief that is available for any new borrowings incurred after 5 April 2013, as this will affect future IHT liabilities. Farmers and landowners who will be affected by the change need to review their business structure and ownership of property to ensure that the right strategies are in place in the future to minimise IHT liabilities.
 
Any individuals who wish to discuss IHT planning should contact either Nick Dee or Peter Griffiths.