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Osborne in surprise attack on inheritance tax planning

New measure will affect UK doms and non-doms, including traditional estates

25 March 2013

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Loans artificially taken to reduce an estate’s value for inheritance tax (IHT) purposes have become the latest target of the government as it tries to close in on tax avoidance schemes.

In an unexpected move unveiled in last week’s Budget, George Osborne said the government will “close an IHT loophole that allows a deduction from the value of an estate for an outstanding debt regardless of whether or not the debts are paid after death, or how the borrowed funds have been used”.

The move, in the avoidance and evasion chapter (section 2.193) of Osborne’s report, is one of the more “surprising” Budget announcements, according to Glen Atchison, head of the private client group at Harbottle & Lewis, who said the technique was one “many may have considered fairly unaggressive and sensible tax mitigation”.

“Interestingly, it could prove to be good news for insurance companies, with some clients choosing to insure against IHT liabilities,” he said.

“Conversely, the announced measure may just push some people into considering more sophisticated and aggressive structures, although they will now have to do so in the shadow of the general anti-abuse rule (GAAR), which comes into force later this year.”

In future, a deduction will not be allowed for outstanding loans on death unless the loan is repaid or there’s a good commercial reason for not repaying.

Deduction will not be allowed either for liabilities incurred to buy property that is excluded from IHT and for liabilities incurred to buy assets on which a relief is due.

The rule applies to people domiciled in the UK and non-doms who use debt.

Three-pronged attack

Andrew Goodman, partner in the private client team at Taylor Wessing, said: “It may be a footnote in the ongoing moves against tax avoidance but could have much greater significance at a time when the world’s wealthy are rushing to transfer their London homes out of offshore companies and looking to find new ways to reduce their exposure to UK taxes.

“The three-pronged attack against the use of such companies takes effect from 1 April but the detail of the new provisions will only be published on Thursday 28 March – too late to be factored into their plans.”

Alastair Collett, private wealth partner at Bircham Dyson Bell, warned the move could also affect traditional businesses.

“This measure is likely to affect a number of estates where agricultural and business property relief claims would have been made where funds may have been borrowed (with security given) against other assets,” he said.

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Tax & Wealth structuring