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Changes to Liabilities Deductible for IHT Purposes
The 2013 Budget announced that further restrictions would be placed on the deductibility of debts, with no prior consultation undertaken.
This measure appears to be largely designed to clamp down on the use of debts in IHT avoidance schemes, but will also have an impact on the general deduction of debts taken on to purchase certain types of property such as business or agricultural property.
Tax payers should be cautious of the new rules and seek advice when borrowing money to invest, particularly in business/agricultural property or timber, as there remains a risk that the debt may be deducted from the value of the property itself, rather than from the main estate, under the new measures if imposed. There are particular concerns in relation to Nil Rate Band Trusts and related interest or indexation on which detailed expert advice would be required.
The new rules may well be subject to amendments to clarify the more complex provisions, particularly in relation to the discharge of liabilities after death and associated corrective accounts. However, if the new restrictions do achieve Royal Assent this summer then they will have retrospective application and are to be actively considered in the above circumstances.