Take IHT to the limit
When you die your executors must pay inheritance tax at 40% on the net value of your estate. But what is the net value?
The executors can claim reliefs, exemptions and allowances. Up to 100% of the value of assets qualifying as business property or agricultural property is covered by a relief, depending on exactly how the property is held. Anything left to your UK domiciled spouse or civil partner or to a charity is exempt.
As well as the reliefs and exemptions, you deduct any loans and mortgages, owed at the time of death, to arrive at the net chargeable value of your estate. The first £325,000 of your net estate is then covered by your nil rate allowance, unless that has been wholly or partly used up by lifetime transfers.
Now, for deaths after the Finance Act 2013 is passed (expected to be mid July 2013), the deduction of loans will be subject to more restrictions.
Any loan must be deducted from the asset it was used to acquire. So if you increased the mortgage on your home to invest in your business, that ‘business part’ of the loan must be deducted from the value of the business and not from your remaining estate. However, the value of your business is likely to be covered by a 100% relief, so you don’t benefit from the deduction.
If the loan owing at death is not actually repaid to your creditor after death, that loan can’t be deducted from your estate, unless there is some commercial reason for not repaying the loan.
These changes are likely to increase the net value of your estate and mean more inheritance tax will be payable. There may be other solutions to this IHT problem, so if you think you might be affected, we can help.