While the Chancellor confirmed in his latest Budget that the nil rate band for inheritance tax (IHT) will remain frozen at £325,000 until at least 2017-18, another proposal is set to have a significant impact on businesses.
Although businesses qualify for business property relief (BPR), making them exempt from inheritance tax, this does not apply to the homes of their owners.
Consequently, many business owners have taken out loans against their homes to invest in their businesses, with the added benefit of the outstanding debt being deducted from the value of their estate, regardless of whether it is paid after death or not. This minimises the inheritance tax liabilities due.
The government is, however, set to legislate in the Finance Bill 2013 to limit the way such deductions are applied. When the loan is used for assets that qualify for BRP or other reliefs, such as agricultural property relief (APR) or woodlands relief (WR), the debt will be used to reduce the value of those assets to which the relief applies.
Any excess liability can be deducted from the estate to repay the creditor, unless there is a valid reason for not doing so.
These changes will apply to deaths and chargeable transfers on or after the date that the Finance Bill 2013 receives Royal Assent.
As a result, business owners will have to budget for unexpected, heavy tax bills, which could leave their relatives with difficult decisions to make.
Therefore, it is important to seek professional advice on how the impact of these changes can be minimised. The team at JW Hinks can advise on all aspects of inheritance tax minimisation, ensuring adequate provision for your family and the continued success of your business.
Please contact us for further information and guidance.