Managing trusts and tax

Publish date

3 November 2022

How does refinancing debt for agricultural businesses impact on inheritance tax planning?

In times of financial turmoil, it may be sensible or even essential to review the terms of loans and other debt arrangements. However, when it comes to agricultural and business property care needs to be taken when looking at historic debt arrangements as new liabilities may have an adverse impact on the availability of reliefs for inheritance tax purposes.

In the past, standard planning for inheritance tax involved securing debt on assets that did not attract relief for inheritance tax, such as a house, even where those funds may have been used in the farming or other business.   The assets that qualified for agricultural or business relief were available to have the full qualifying agricultural value deducted for inheritance tax purposes and the non-relievable assets had the benefit of being reduced in value by the debt attached to them.

Finance Act 2013 and inheritance tax

Restrictions where introduced by the Finance Act 2013 to target some artificial arrangements but which also have an effect on this sort of planning.  As the restrictions affect inheritance tax relief the liabilities would be considered typically on transfers of value on death or when making a gift in lifetime.  The restrictions apply to transfers of value on or after 17 July 2013.  There are rules to ensure the debt is a qualifying debt in itself and not an artificial arrangement.

Therefore, prior to 17 July 2013 generally a liability that was an incumbrance on a particular asset reduced the value of that asset.  For transfers on or after 17 July 2013 it is necessary to look at the use the financing was put to and when the debt was incurred.

Where a debt is incurred on or after 6 April 2013 and used or attributed for financing (either directly or indirectly) property that qualifies for agricultural relief then the agricultural relief will be reduced accordingly on a transfer of value.  This is the case even if the debt is secured on other non-relievable property.  The liability is still deductible for inheritance tax purposes but the value of the liability is deducted first from the qualifying agricultural asset and so reduces its value which in effect wastes agricultural relief.  Only if the value of the debt exceeds the value of the agricultural property can the remaining value of the debt be deducted of the value of non-relievable property which would be subject to inheritance tax relief.

The deductibility of a liability is restricted to the extent that it can be attributed to financing agricultural property (directly or indirectly) where it has been used to:
•     Acquire agricultural property
•    Maintain agricultural property
•    Enhance the value of agricultural property.

Care needs to be taken when looking at the date of the liability. Generally the liability will be the date of the original agreement. However, if the agreement has been in some way varied on or after 6 April 2013 then the liability may be treated as having been incurred on the date of the variation.

If the liability in question is only partly for the financing of agricultural property then only that part of the loan would need to be deducted from the agricultural value.

Due to the nature of farming and other business operations these restrictions are of particular relevance.  Similar restrictions apply to other assets and will affect business assets and so the deductibility of business relief. The effect of the restrictions is that the liabilities are deducted from the value of the relievable property before the relief is applied, but the procedure is slightly different for each type of relief.

If you have any questions about estate planning and the availability of reliefs for inheritance tax purposes, please get in touch

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