For many business owners today’s Budget brings the prospect of significant new inheritance tax liabilities, says KPMG.
The Chancellor has confirmed that the inheritance tax free band will be frozen at £325,000 until at least 2017/18. More families will thus overtime have to pay inheritance tax.
But hidden away in the small print is an even more worrying development for business owners.
A business is normally exempt from inheritance tax because of a specific relief known as business property relief. However, the house in which the owner lives is subject to inheritance tax.
It was therefore commonplace for the business owner to borrow from a bank to fund his or her business, but give the bank as a security for its loan a charge over their home.
This was very tax efficient –the debt to the bank reduced the value of the house for inheritance tax purposes and hence the inheritance tax bill.
However, this is to be stopped. Today’s Budget provides that debts to fund a business cannot be used to avoid an inheritance tax bill on other assets.
This means that business owners face new inheritance tax bills –many for the first time.
David Kilshaw, tax partner at KPMG said: ‘’This is a nasty shock for business owners. They will now have to budget for unexpected inheritance tax bills and they may be faced with a horrible choice –do their heirs sell the family home or does the business pay the tax?’’
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 12,000 partners and staff. The UK firm recorded a turnover of £1.8 billion in the year ended September 2012. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 156 countries and have 152,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.