H M Revenue & Customs ("HMRC") has published a change of view on the treatment of specialty debts for inheritance tax ("IHT") purposes which could mean that specialty debts not previously within the scope of IHT, will now be chargeable.
On 23 January 2013, HMRC published, without consultation, an update to their guidance on the status of specialty debts for IHT purposes. A specialty debt is a debt recorded in a deed. Such debts are often used for IHT planning on the basis that, as confirmed in HMRC's previous guidance, if the deed is kept in a foreign jurisdiction, the debt is treated a non-UK situated asset for IHT purposes. Non-UK situs assets are outside the scope of IHT for non-UK domiciled individuals and trusts with a non-UK domiciled settlor.
HMRC's position as from 23 January 2013 is that a specialty debt is situated in the jurisdiction where the debtor resides. This could have a significant impact for non-UK domiciled individuals and offshore trusts that own a specialty debt if the debtor is UK resident. The debt could now be subject to IHT when the owner dies or, in the case of a trust, at each ten year anniversary or when the debt is appointed out of the trust.
HMRC's change of view is highly controversial and contrary to existing legal commentary. Although HMRC's views are not legally binding, a tax-payer would need to bring legal action against HMRC if he wanted to dispute it. Unless or until we have such a test case, we are uncertain whether HMRC's view will be upheld by the courts. In the meantime however, owners of specialty debts should consider whether they wish to review their arrangements so as to avoid the risk of increased IHT exposure.
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