One of the unexpected changes in this year’s Finance Act was the countering of a very simple and long-established little strategy. Broadly, if you have property potentially liable to IHT, why not borrow against it (thus reducing the value for IHT purposes) and use the proceeds of the loan to invest in property on which you don’t pay IHT (such as property qualifying for Business Property Relief or, if you are domiciled outside of the UK, foreign property)? The net effect is that you (in effect) turn chargeable property into exempt property. Very neat.
Sadly, such planning was countered by the Finance Bill: the liabilities will no longer be deductible for IHT purposes. And, worse still, the new rules contain a degree of retrospection.
In regard to debts secured against Business Property, the planning is countered only in respect of liabilities created or incurred after 5 April 2013. So if, before that date, you mortgaged your investment properties to the hilt and used the money to buy (qualifying) AIM-listed shares, you’re still OK: the debt is still deductible from the value of your investment properties and reduces the value of your chargeable estate. So far so good: that’s what you’d expect. However, this “grandfathering” applies only to Business Property: it doesn’t apply to planning using “excluded property”. So if you are not domiciled in the UK and you have borrowed against your (chargeable) UK assets and placed or invested the money offshore, the planning is now ineffective – even if you carried it out many years ago. As a result, your UK estate may now be rather larger than you thought it was and your whole IHT planning strategy may need to be revisited.
What can be done? It depends on your circumstances: but to find out more contact Terry Jordan.