It would appear that the answer to this is when it is a debt used to obtain some form of Inheritance Tax (IHT) advantage.  Changes announced by the Budget 2013, when implemented, will have a significant effect on Inheritance Tax planning.  The proposal is to disregard certain debts in the calculation of the estates of individuals where they have been incurred under certain circumstances.  Simply put, they will not allow, as a deduction against the assets in an individual’s estate, any debt that has arisen as a consequence of taking assets out of the IHT tax net. Perhaps the most prevalent example of this will arise when people take out a mortgage on their own home and then use the funds to purchase an asset that is exempt for IHT purpose, such as those qualifying for Business Property Relief (i.e. Business Premises).  Under these circumstances, it will no longer be possible the outstanding mortgage against the value of the home on death.

These new tax changes will also impact upon debts to trusts, such as those to Employment Benefit Trusts (EBT’s) and Employer Financed Retirement Benefit Schemes (EFRBS).  Such debts often arise as a consequence of implementing tax strategies aimed at profit extraction from companies.

It appears certain, that this new tax legislation will represent a significant blow to planning used to defend against IHT liabilities.  Anyone who has been relying upon such loans as a means of reducing their estates will now have to revisit their planning in order to ensure that any steps taken to reduce their exposure to IHT are still appropriate.

At DEB Chartered Accountants we are well aware of the growing significance of Inheritance Tax to many of our clients.  In light of this we have developed software to review exposure to IHT and can give valuable advice to hep you minimise your IHT liabilities before it is too late.  If Inheritance Tax is a matter of concern to you please do not hesitate to contact us.