As I have said on more than one occasion in my writing about the general anti-abuse rule, the GAAR does not spell an end to targeted anti-avoidance rules.
And this year’s Finance Act proves the point in relation to inheritance tax.
In its 2013 Budget, the Government announced new provisions aimed at neutralising some of the inheritance tax advantages that can apply in connection with loans taken by the deceased which remain outstanding on their death.
In this regard, the Government announced that these new provisions would prevent a loan being deducted from a person’s taxable estate before calculating inheritance tax when either:
– The loan was used to acquire, maintain or enhance property qualifying for business property relief, agricultural property relief or woodlands relief
– The loan was used to acquire, maintain or enhance excluded property, (ie usually, but not exclusively, non-UK situs property owned, usually, by non-domiciliaries that is, as a result, exempt from IHT)
– The loan was not repaid on death and there was no good commercial reason for this.
The original proposals applied to all deaths or other chargeable events arising after the Finance Bill 2013 receives royal assent – which it did on 17 July.
Originally, there was no condition in relation to the date that the loan was taken.
This meant that even loans taken out (without time limit) before the new restrictions were announced would be swept up by this provision.
Okay, perhaps not retrospective strictly speaking but very much retroactive.
In relation to BPR, APR and woodlands-relievable property, it is understood that this measure is primarily aimed at arrangements that (at least in the eyes of HMRC) aim to give an individual a “double deduction” by securing a loan on, say, residential property thus securing a deduction on death, yet enabling the borrower to invest in assets that are relieved from inherit-ance tax,for example, Aim shares which qualify for 100 per cent business property relief.
The legislation does not discriminate in relation to intent and so could easily catch innocent commercial transactions.
For example, individuals seeking to invest and work in a trading business or to
purchase agricultural property to farm may take a loan on the security of their principal private residence or other personal assets.
Such an arrangement would primarily (mostly exclusively) be commercially motivated and tax would not be any kind of determinant.
As a result, a number of professional bodies raised concerns that the legislation as intended was unfair. Some pretty coherent arguments were advanced as to why the provisions, as drafted, were misconceived. Similarly well argued comments were made in relation to the non-relievable nature of loans taken to acquire, enhance or maintain excluded property.
The Government has listened to these representations and decided that (in relation to the acquisition, enhancement or maintenance of property that qualifies for BPR, APR or woodlands relief) only loans entered after 5 April 2013 will be affected by these new provisions.
So it has listened but only introduced a small relaxation in relation to the time the loan was taken.
There has been no general relaxation by reference to intention which was what was hoped for.
Would it have been that difficult, for example, to exclude from the non-deductibility rules any loans taken to invest in businesses or farms by individuals who work full-time in the enterprise that receives the benefit of the funds borrowed – subject to suitable safeguards?
Apparently it is (too difficult) and so advisers to business owners and farmers must be aware of this when calculating the potential IHT liability of these individuals.
One unintended consequence of these provisions is likely to be an increase in the IHT liability of some business owners and farmers.
Not by reference to any direct reduction of BPR or APR or woodlands relief but the increase in the IHT value of non-relievable assets which would have otherwise been reduced by a deductible debt.
Of course, this may also be the case for some non-UK domiciliaries. The former category, of course, represents, for most advisers, a greater and more accessible client segment.
For those of the right age and in good health the role of life assurance in trust (usually on a last survivor basis) for married couples (given the spouse exemption and transferable nil rate band), as a means of providing for the liability without changing their life, should not be overlooked.
Tony Wickenden is joint managing director of Technical Connection
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