HM Revenue and Customs has confirmed that new inheritance tax rules under Finance Bill 2013 will prevent borrowed money used to buy, enhance or maintain excluded property being deducted from an individual’s IHT liability, as the government seeks to close perceived loopholes in the tax.
According to HMRC the same rule will apply where borrowed money was used to acquire, enhance or maintain assets that become excluded property.
There are two common situations where this would apply, according to the Revenue:
1) the trustees of an excluded property trust that owns assets in the UK borrow money and then set the debt against those assets immediately before the 10-year anniversary. They invest the borrowed funds abroad so that they become excluded to avoid the 10-year charge; and
2) a person who is not domiciled in the UK borrows money from a UK source, secured against their UK assets, and buys a property abroad.
It may also apply where a person domiciled in the UK acquires an interest in an excluded property trust depending on the nature of the interest acquired, HMRC added.
For example. the trustees of an excluded property trust, which includes UK property of £1.5m, borrow £1m which they charge on the UK property. They use the funds to buy shares in an overseas company, which are excluded property.
Although the liability is charged on UK property, the liability is disallowed by HMRC’s new inheritance tax rules. According to HMRC this is because the liability has been incurred to directly finance the acquisition of excluded property.
There are three exceptions to the new rule: where the excluded property has been sold and the proceeds are chargeable assets in the deceased’s estate; the property is no longer ‘excluded’; or the property has fallen in value.