A change in the way that loans are treated for inheritance tax (IHT) purposes could increase the taxable value of your estate on death, and therefore the amount of tax payable. This change will affect IHT calculated on deaths occurring after the Finance Act 2013 is passed - expected within the next month - but it will apply to loans which are already in place.
At present, any debts owed by a deceased person’s estate are deducted from the net estate after tax reliefs such as business property relief (BPR), have been given. However, after the Finance Act 2013 is passed, the value of a loan will have to be deducted from the asset that it was used to acquire.
What does this change mean, in practical terms? Well, if a business owner has borrowed against their home and invested the loan money in their business, and if the loan is still outstanding upon death, then the IHT calculation will require the loan to be deducted from the value of the business, and not from the value of the home. This reduces the value of the estate that is exempt from IHT under business property relief, and therefore increases the taxable value of the remaining estate.
There are plans that can be made to make sure that your estate is as tax-efficient as possible, and those plans depend on individual circumstances. If you would like to discuss your situation please contact me.
