The Finance Bill 2013 unexpectedly introduced a provision which, if enacted, will throw on its head the concept that Inheritance Tax is chargeable on the net estate of an individual (namely after deduction of liabilities, including debts). The consequences of this proposed legislation will be twofold: Firstly, an increase in the Inheritance Tax liabilities and secondly potentially lenders being unwilling to lend at the same levels as previously.

In summary, estates’ outstanding loans will not be deductible in the following circumstances:

a. The loan is not repaid by the Executors;

b. The loan has been incurred to acquire property which is excluded from the charge to IHT;

Where the liability has been incurred to acquire assets in which a relief such as Business Property relief, Agricultural property relief or Woodlands relief is due, the liability will be taken to reduce the value of the assets that can qualify for relief.

To take an example, if prior to the Finance Bill X has borrowed £1million against the security of his home valued at £2million in order to buy shares in a private trading company (a business qualifying for full Business Property relief), on X’s death two years later (and assuming the values remain the same), no IHT would be payable on the shares. However, IHT would be payable on the home ignoring the loan.

As indicated this is therefore a trap for the unwary and careful consideration should therefore be given before committing to new loan/debt arrangements falling within the above changes. If you would like further information please contactRichard Monkcom of Druces LLP’s Private Client Team at r.monkcom@druces.com or on 020 7638 9271.