How owners of assets which previously qualified for 100 percent BPR or APR will fund future IHT liabilities is a question many are now considering. Typically, these assets will be an interest in a business, shares in an unquoted trading company or farmland, none of which are typically easy to sell in parts to raise funds. Nor would such a course of action necessarily be desirable for the reasons considered below.
Borrowing funds to meet the liability could be an option if a willing lender can be found and the asset is not already highly geared. That though raises the additional issue of how to service interest payments on the debt and ultimately repay it at the end of the term.
For those in good health who have not yet reached old age, life insurance will be an option to consider.
Where liquidity exists in the form of cash in a company whose shares are subject to an IHT charge, this could be paid out as a dividend to fund the IHT. The shareholder will be subject to income tax on the dividend, and this double tax charge will result in an effective tax rate of some 34 percent. Furthermore, if too much cash is retained in the company with a view to it being used for this purpose, it could further reduce the availability of BPR as it will be an ‘excepted asset’.
If, alternatively, cash can be realised which receives capital treatment for tax purposes, subject to any future increase in capital gains tax rates that would be a more cost-effective route to raising funds. In certain circumstances, sale of the asset itself, in whole or part, may be a pragmatic option. In other situations, such a course of action may well be contrary to the owner’s wishes in terms of succession and, where it breaks up ownership of the asset for the future, may give rise to a plethora of non-tax issues down the line.
There are specific legislative provisions which allow for a share buy-back by an unquoted trading company (or the holding company of a trading group) to be treated as capital for tax purposes in certain circumstances. One of those circumstances is where the proceeds are used to pay an IHT liability arising on death and which is paid within two years of death. There is an additional requirement that the IHT liability could not have been met ‘without undue hardship’ by any means other than a share repurchase. This term introduces an element of uncertainty into the provisions, as the legislation does not provide clear parameters for what constitutes ‘undue hardship’ and there is a lack of guidance or case law to rely upon here, although there is a clearance procedure. It is anticipated that HMRC may take a robust stance on such claims and affected taxpayers would be wise to proceed with caution. This was an issue discussed at the House of Lords Finance Bill sub-committee however, and it remains possible that these provisions could be relaxed or widened in some way.
