The UK government has launched an “unexpected attack” on debt relief within the inheritance tax framework, which is likely to affect rural and agricultural estates, according to law firm Boodle Hatfield.

The firm warns that the Finance Bill 2013, introduced following the annual UK budget in March, and which is expected to be signed into law in July this year, will restrict the deductibility of debts against IHT, resulting in higher or unexpected inheritance tax liabilities.

The issue comes at a time when wealthy individuals have been buying working farms - with a clear profit-and-loss-account - on the assumption that this gives complete protection from inheritance tax. According to guidance from HM Revenue and Customs, Agricultural Relief is usually given at 100 per cent on qualifying property but any outstanding mortgages on the property must be deducted before calculating the relief.

“This change has come completely out the blue, with no government consultation.  It is going to have a significant impact on the way rural and agricultural estates structure their borrowing and debt and possibly lead to higher IHT exposure,” said Fiona Graham, partner in the private client and tax team at Boodle Hatfield.

Some business and agricultural properties are relieved from IHT, by either business property relief or agricultural property relief, often at 100 per cent, meaning that no IHT is payable. It is common for rural estates to secure lending against property that does not benefit from this relief so that the liability reduces its value for IHT purposes, the firm said.

“It has, until now, made little sense for an estate to secure lending against an asset that is relievable from IHT and thus depress the value of that asset, when further relief can be obtained by securing lending against non-relievable property,” said Graham.

In other recent developments, last month Boodle Hatfield promoted four solicitors to partner in its London office. Hayden Bailey was promoted partner in the private client and tax division, Tim Maxwell in litigation, and Christina Christou and Graham Winkley in property.