Inheritance tax warning

New regulation could hit the families of business owners with increased tax bills, an expert has revealed.

The warning from the regional tax expert comes as a new bill is set to become law in July, meaning business owners may need to re-think their financial arrangements.

Traditionally, when a sum of money is borrowed to invest in a business, the borrowing may be secured on a personal asset such as a home.

On the death of the business owner who took out the loan, this borrowing can in fact reduce liability for inheritance tax (IHT).

Nadeem Hussain, director and head of tax at Pierce, the Blackburn business advisory and accountancy group, explains this is because IHT is charged on the total value of assets – minus any debt.

So borrowing £100,000 against an asset worth £300,000 such as a house, would mean the value of the house is worth just £200,000 for IHT purposes – a significant saving.

But Nadeem warns that under the new Financial Bill which becomes law in July, the rules will change in a bid to clamp down on business owners creating a debt simply with the aim of reducing an IHT bill.

He said: “Many people who have borrowed money to invest in a business have done this for entirely legitimate reasons and not with the sole purpose of reducing an IHT bill.

“However, they may still be caught by the new rules, potentially leaving a family with a much larger tax bill that they were not planning for. It may be that a significant asset like a home or business may even need to be sold to pay the bill.

“Anybody who could be affected by these changes should consult their advisor.”