Liabilities and Foreign Currency Bank Accounts

Legislation introduced in the Finance Bill 2014 will impact the estates of non-UK domiciled and non-UK resident individuals who die on or after the date of the Royal Assent to the Finance Bill (which should be sometime in July this year) and who, in their lifetimes, have placed borrowed funds in a foreign currency UK bank account, so that such debts will no longer be deductible against the value of the individual’s estate for UK inheritance tax (IHT) purposes.

By way of background, the Finance Act 2013 introduced a provision allowing for a liability (so money owed by the deceased on death) to be deducted from the estate as long as it had not been used directly or indirectly to acquire excluded property (ie property outside the scope of IHT) or to maintain or enhance the value of that property (with a few exceptions). These provisions could be circumvented by individuals who were neither domiciled nor resident in the UK by their depositing borrowed funds in a foreign currency UK bank account. Therefore the balance in the account was not subject to IHT and the debt incurred to borrow the funds was deductible for IHT purposes.

However, the amendments introduced by the 2014 Bill seek to remedy this discrepancy and will prevent a liability from being deducted on any death after the date of Royal Assent if it is used to finance a foreign currency bank account (either directly or indirectly) that is left out of account for IHT purposes. The liability will only be deducted when calculating the value of the estate to the extent that it exceeds the balance of the bank account (subject to a certain exceptions). The Bill also provides for a 'deemed order of discharge' where a liability, used to finance both a foreign currency bank account and another asset(s), is partly discharged. The deemed order will establish whether the part of the liability discharged is allocated to the bank account or not.

Ten-year anniversary charge

Trusts falling within the 'Relevant Property Regime' (broadly all trusts created after 22 March 2006 and pre-22 March 2006 trusts where there is no beneficiary with a right to the trust income) are subject to a tax charge on the value of the trust fund at each ten-year anniversary of its creation at a maximum rate of 6%. The Finance Bill 2014 provides that where there is income in such trusts which remains undistributed for more than five years, that income will be treated as part of the trust capital and therefore increase the value of the trust that is subject to the ten-year anniversary charge.