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Tax Tip

IHT planning Idea from HMRC

 We asked Stuart and TK about HMRC and anti-avoidance rules potentially affecting Inheritance Tax Planning.

 
Various IHT saving schemes and arrangements have evolved over the years. Many of them have subsequently been blocked by IHT anti-avoidance rules (and even a special income tax charge on ‘pre-owned assets’). One such IHT anti-avoidance rule concerns unpaid liabilities at the time of death. 
 
IHT is charged on death as if the deceased had made a transfer equal to the value of his or her estate immediately before death. As a general rule, a liability may be taken into account in valuing a person’s estate if it is legally enforceable, and is imposed by law or incurred for consideration in money or money’s worth (IHTA 1984, s 5(5)).
 
However, following legislation introduced in Finance Act 2013, there are conditions and restrictions to this general rule in respect of the deduction of liabilities, including liabilities unpaid at death (IHTA 1984, s 175A).
 
These are anti-avoidance measures to block schemes and arrangements aimed at exploiting the IHT rules on liabilities to reduce the value of an estate. Those arrangements broadly involve obtaining a deduction for a liability, and not repaying it after death.
 
A liability which exists on a person's death may be deducted from the deceased’s estate if it is discharged on or after death, and would not otherwise be disallowed for IHT purposes.  Alternatively, if all or part of a liability is not discharged on or after death, it can only be deducted if three conditions are satisfied.
 
  1. There must be a real commercial reason for the liability not being discharged
  2. The liability is not being left unpaid as part of arrangements with a main purpose of securing a ‘tax advantage’ as defined
  3. The liability is not otherwise disallowable for IHT purposes.
 
The problem with most anti-avoidance legislation is that it can affect cases where no deliberate attempt has been made to exploit the rules they were intended to protect.
 
 
Many people take out life insurance policies to ensure that outstanding liabilities are repaid in full, in the event of the individual's untimely death. In practice, such policies are often written into trust, if not, the insurance proceeds will generally form part of the deceased's estate. Consequently, there can sometimes be delays in the insurance company paying out, due to the deceased's executors first having to obtain probate to administer the estate, including dealing with the insurance claim.
 
If the insurance policy proceeds are paid to the deceased's estate, this could result in an IHT liability on those proceeds. If part of a trust, then the proceeds are payable to the trustees instead and normally fall outside the deceased’s estate. Trust arrangements can therefore result in IHT savings.
 
However, the problem arises if the insurance policy has been taken out to cover a loan or mortgage, and the policy has been written into trust, the rule about discharging a loan/mortgage on or after death out of the estate may well come into play.
 
It would appear that no deduction would therefore be available for the mortgage or loan when calculating IHT on the deceased’s estate. The effect of the anti-avoidance rules in such circumstances has caused some concern, particularly when the rules were first announced.
 
HMRC offers guidance in its Inheritance Tax manual (at IHTM28028), which acknowledges the practical difficulties in similar situations. HMRC also offers two possible solutions. 
 
  • The first is for the deceased’s personal representatives to take out a new loan, to repay the original one.
  • The second solution applies where there is an insurance policy held in trust.
 
It is worth remembering that it is not always necessary for a liability to be repaid before a deduction is allowed in the deceased's estate. There may be a good commercial reason for a loan to remain in place.
 
For example, a family member may inherit a house on the deceased's death. The house may be subject to a commercial loan or mortgage. If the lender is content that the house can be transferred to the family member provided that they take over the loan and continue making the repayments, HMRC accepts that the liability may be allowed as a deduction against the deceased’s estate. 
 
If you need any help and advice on Inheritance tax or capital gains Tax, don’t hesitate, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar NOW to discuss how ABDS can help in all your financial planning.
 
ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900 E-mail: abds@netaccountants.net
 
Brilliant with numbers  
Great with people  
Clear and precise with advice
Timely and cost effective
In touch with issues that face our clients
Mindful of our client’s long term strategic goals
 
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