Business owners risk higher inheritance tax bills

The introduction of the Finance Bill in July may see families of business owners being hit hard by changes to the way in which inheritance tax falls due.

Currently, should a business owner take out a secured loan against a personal asset such as their home for the purposes of business investment; inheritance tax will be calculated only on the difference between the asset and the balance of the loan. Inheritance tax relief specifies that no tax will fall due on the business asset.

So for example:

The owner of a taxi firm secures a £200,000 loan, secured against his home, in order to invest in ten new cabs. His home is valued at £400,000. If he dies and inheritance tax then falls due, this will be calculated at 40% of £200,000 which would be £80,000.

Under the new rules however, the calculations differ. Reliefs will be withdrawn and inheritance tax will be charged on the value of the asset against which the loan has been secured.

Example:

The same taxi driver takes out the same loan for the same purpose after July. If he then dies, inheritance tax will be charged at 40% of £400,000, making the bill £160,000 – twice what his loved ones would have had to pay in the past.

It’s easy to see then, the significant impact that this could have on many families – even if the business owner didn’t deliberately plan the manoeuvre in order to reduce his eventual inheritance tax bill.

There may be other strategies which can be put into place to lessen the impact that this could cause on a family’s finances, but with only a few weeks to put these in place, affected individuals must seek advice immediately.

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