14 August 2013

An ‘aspiration nation’ budget was the tagline used by the Chancellor for his budget, but proposed changes to the way in which restrictions on the deductibility of certain debts for inheritance tax (IHT) purposes are dealt with could have an impact on farm borrowings.

The draft legislation was published in late April and it is clear that these changes will affect a common way of structuring farm borrowings which in the past would have reduced the potential IHT charge on death.

The following example illustrates how the system currently operates, and what may change: a farmer buys some farmland for £2 million with cash and £1 million of bank borrowing. He secures the debt on some non-agricultural cottages that he already owns. Because the cottages are non-agricultural they would not usually qualify for any IHT relief.

In the past the position on his death would be that the land would qualify for full APR (subject to the normal conditions for the relief) and the £1 million of debt would be deductible against the value of the cottages. The IHT saving could be £400,000.

These changes limit the deductibility of debts attributable in whole or part to financing the purchase of agricultural and business property. As a result the value of the loan is first deducted against the value of the farm land that he purchased and only if the debt exceeds the value of the land would the balance be deductible against the cottages. In this example the cottages would therefore be subject to IHT with an extra IHT cost of £400,000.

The rules go wider still: where a loan has been used to finance the maintenance or enhance the value of relievable property, the value of the debt will again be deducted against the relievable property rather than the rest of the estate.

The new rules are retrospective in that they will apply to any debts of this sort in existence at the date of death irrespective of how long ago the arrangements were put in place. Past planning that took advantage of the old rules should be reviewed.

For more information please contact Tom Hewitt.

Key contact

Tom Hewitt

Tom Hewitt Partner

  • Private Wealth
  • Head of Estates and Land
  • Head of Food and Farming

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