A relevant loan is one that has been used by a trust, partnership or individual to acquire, maintain or enhance UK residential property or any non-excluded property (i.e. a company or partnership that holds any such residential property).
This definition of relevant loans is far reaching. It means that the lender (who will not necessarily be aware of their new status) will now hold non-excluded property and will therefore be exposed to IHT.
The owner of the UK residential property itself (whether it is held outright or through some type of structure), on the other hand, may still be able to mitigate their exposure to IHT, for example by taking out life insurance.
Whether or not this will make the cut in the final legislation remains to be seen. Nevertheless, a huge number of lending arrangements in connection with UK residential property will need to be reviewed before the new rules come into force on 6 April 2017.
From that date onwards, there will be IHT implications for an individual if he or she dies holding a relevant loan, and for a trust if a ten-year anniversary occurs while the trust holds such a loan (and, if the trust has a living settlor, perhaps also in the event of the settlor’s death).
Even more worryingly, the non-excluded property concept extends, in the new draft legislation, to “money or money’s worth held or otherwise made available as security, collateral or guarantee for a relevant loan”.
This means that where assets of any description have been made available as security, collateral or a guarantee for a loan that has been used to purchase or maintain a UK residential property (or a residential property holding structure), all such assets will from 6 April 2017 be within the scope of IHT.
The idea of bringing collateral for relevant loans into the IHT net is, arguably, a fair one. Absent a measure such as this, there would be continued scope for non-doms with significant foreign investment portfolios to mitigate / avoid IHT by taking out a commercial loan to purchase a UK home with a 100 per cent loan to value, so that (at least initially) there is no IHT exposure with respect to the property.
Before the new legislation was brought in, there had been several concerns raised that, as the legislation was previously drafted, the IHT exposure on the collateral is not limited to the amount of the loan.
