HMRC's change of view on debts created by deeds is wrong, says expert

A specialty debt is a debt which is created by a deed or an instrument under seal, rather than just by a normal signed contract.

HMRC has changed the guidance in its inheritance tax manual to say that it no longer accepts the long established view that the place where a specialty debt is situated (its situs) is where the deed is located. HMRC states that its previous approach is "unlikely to be correct" and says that it now believes that the situs of specialty debts is where the debtor resides.

The change in interpretation has particular significance for inheritance tax. This is because non-UK situated assets owned by a non-domiciled individual are 'excluded property', which means that they are outside the scope of inheritance tax. In the same way, non-UK situs assets held by the trustees of a trust made by a non-domiciled settlor are excluded property.

Ray McCann says that the announcement has been made without consultation and the wording creates uncertainty for many individuals who are parties to existing specialty debts. "Take the example of a non-UK resident, non-UK domiciled taxpayer who has settled a specialty debt due from a UK resident individual. Have they made a chargeable lifetime transfer or settled an excluded property trust?" he said.

McCann thinks that HMRC's revised approach is incorrect, although he accepts that where the debt is secured on UK assets, the situs of the specialty will be more doubtful. He criticised HMRC for not providing any legal or technical analysis to support its view.

 "It is our view that providing a specialty debt is not secured on a UK situated asset then HMRC should not be able to assert that the specialty is a UK situs asset. Similarly, if the specialty debt is secured on an offshore asset, then HMRC are unlikely to succeed in arguing that the debt has a UK situs unless the deed is situated in the UK on the death of the creditor." McCann said.

Case law establishes that a simple contract debt, that is a debt which is not created by a deed, is situated where the debtor resides. However, HMRC guidance in the inheritance tax manual used to state that a specialty debt was situated where the instrument happens to be, as this was the previous established view based on the case law.