UK Revenue changes view on location of specialty debts for inheritance tax purposes

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The UK Revenue (HMRC) has changed its view on where speciality debts are located for UK inheritance tax (IHT) purposes. The change could impact on offshore trusts where money has been lent to UK resident beneficiaries on the basis that the debt was a specialty debt and was located outside the UK.

Trustees who have made loans to UK resident beneficiaries by way of speciality debts should review the position with their advisers, particularly where a 10 year anniversary charge is approaching or the settlor is able to benefit under the trust or the trust is a pre-March 2006 life interest trust.

A specialty debt is a debt made by deed. HMRC's published view up to 23 January 2013 was that speciality debts were "locally situated where the document is found". This view was relied on by the trustees of many offshore trusts established by non-UK domiciled individuals. HMRC's IHT Manual now states that HMRC "now believe this may not be the correct approach in all cases involving speciality debts"... and that "many such debts are likely to be located where the debtor resides, or where properly taken as security for the debts is situated.".

The trustees of a trust established by a non-UK domiciled individual are only subject to UK IHT on UK assets held by them. Where the trustees of such a trust make a loan to a UK resident beneficiary that loan will, if it is a simple contract debt, be a UK asset in the trustees' hands and subject to UK IHT. Where the loan is made by deed, however, the debt becomes a specialty debt. Up until 23 January of this year HMRC's published view was that specialty debts were located where the deed evidencing the debt was kept. Therefore, if a loan made by the trustees to a UK resident beneficiary was made by way of a specialty debt and the deed evidencing the loan was kept outside the UK the loan was a non-UK asset in the trustees' hands and not subject to UK IHT.

HMRC's new view is that many speciality debts are likely to be located where the debtor resides, or where property taken as security for the debts is situated. Loans made by offshore trustees to UK resident beneficiaries by way of specialty debts may, therefore, now be treated as UK assets in the trustees' hands and subject to UK IHT, regardless of where the deed evidencing the debt is kept.

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