The effect of the Government’s proposals in respect of Agricultural and Business Property Relief has stimulated much public debate but mainly in respect of their deleterious effects on farming and the security of our food supplies. Their effect on businesses, however, is every bit as threatening. Those affected should remember, however, that Business Property Relief (‘BPR’) is not being abolished but is to be reduced from 100% on most business property over £1million to 50%. It is still important for business owners wishing to secure the future of their businesses to maximise the relief which will apply.
In considering the affairs of one particular client we identified the following interesting point.
Relevant Business Property
BPR is given:
‘where the whole or part of the value transferred by a transfer of value is attributable to the value of any relevant business property, …’ (IHTA 1984 s. 104(1)).
Relevant business property (‘Relevant Business Property’) is defined in s. 105 and includes:
‘(a) property consisting of a business or interest in a business;
(b) …securities of a company which are unquoted and which (either by themselves or together with other such securities owned by the transferor and any unquoted shares so owned) gave the transferor control of the company immediately before the transfer;
(bb) any unquoted shares in a company;
(cc) shares in or securities of a company which are quoted and which (either by themselves or together with other such shares or securities owned by the transferor) gave the transferor control of the company immediately before the transfer;]
(d) any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by a company of which the transferor then had control or by a partnership of which he then was a partner; and
(e) any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by the transferor and was settled property in which he was then beneficially entitled to an interest in possession.’
Categories (b), (bb) and (cc) do not, expressly, require that the company concerned should carry on a business.
The exclusion in s.105(3)
It might be thought at first that s.105(3) assumes that a company will necessarily do so. It provides that:
‘(3) A business or interest in a business, or shares in or securities of a company, are not relevant business property if the business or, as the case may be, the business carried on by the company consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks or shares, land or buildings or making or holding investments (emphasis added).’
At closer reading, however, suggests that this provision requires only that, if a company does carry on a business, it must not be a business of the proscribed sort.
So it appears that if the business of the company is not that of dealing or of making or holding investments its shares and securities may be Relevant Business Property even if it does not actually carry on a business or, if it does do so and its business is not a trading activity, it is not a business of making or holding investments.
It is generally thought that the mere holding of money on deposit is not a business. Arguably, holding an asset which does not generate income, such as a valuable painting, is either not a business or, if it is, it is not a business of holding investments (although this will not be so clear cut where an asset, such as an insurance bond, is designed to generate something equivalent to an income. (see Jowett v. O’Neill & Brennan Construction Ltd, ChD 1998 70 TC 566 [1998] STC 482; John M Harris (Design Partnership) Ltd v. Lee SpC [1997] SSCD 240 (SpC 130); but see CIR v South Behar Railway Co Ltd HC 1925 12 TC 657).
Does this represent an avoidance opportunity? Could one transfer an asset such as cash or an Old Master painting to a company shortly before one’s death as a form of death bed planning?
Excepted assets
Will the excepted asset provisions of IHTA 1984 s.112(2) prevent this strategy from being effective? It appears not. They only apply where the putative excepted asset was neither:
‘…
(a) used wholly or mainly for the purposes of the business concerned throughout the whole or the last two years of the relevant period defined in subsection (5) below, nor
(b) required at the time of the transfer for future use for those purposes;’
In our examples of a company holding only money or an asset which does
not produce income such as a valuable painting either the company has no
‘business concerned’ or the holding of the asset is itself the business of the
company. In either case the conditions of IHTA 1984, s.112(2) are
not satisfied so that the company concerned will not have excepted assets.
IHTA 1984 s.103(3)
IHTA 1984 s.103(3) provides:
‘In this Chapter [that concerning BPR] “business” includes a business carried on in the exercise of a profession or vocation, but does not include a business carried on otherwise than for gain.’
One might think that this would prevent relief being applicable to shares or securities of companies which hold assets without aiming to make profits. In fact it can have the opposite effect, causing BPR to apply.
As we have seen, the provisions of s.104(1)(b)(bb) and (cc) do not expressly require a company to carry on a business in order that its shares or securities are Relevant Business Property. If a company, therefore, actually carries on a business but it is treated by s.103(3) as not being a business for the purposes of BPR that would not, on a literal reading, prevent shares or securities in the company falling within s.104(1)(b)(bb) or (cc) and would not, therefore, prevent them from being Relevant Business Property.
As we have also seen, s.105(3) prevents shares or securities in a company from being relevant business property if the company’s business consists of one of various specified dealing activities or of making or holding investments. As we have said, on a literal reading, if the company either does not carry on a business, or its business is treated by in s.103(3) as if it were not a business, s.105(3) cannot apply to prevent the shares or securities being relevant business property.
If the business which the company actually carries on is, therefore, one which is proscribed under s.105(3) the effect of s.103(3) will not be to prevent relief applying but to make it apply.
HMRC’s disingenuousness
HMRC says, in its Shares and Assets Valuation Manual at para. SVM111110:
‘Although the word ‘business’ does not appear in subparagraphs (b) and (bb) of s.105(1), it is considered implicit that a company must have a business to enable its shares to qualify as “relevant business property”. The Special Commissioners confirmed in Grimwood-Taylor and Another (executors of Mallender deceased) v IRC [2000] STC(SCD)39 that for shares in a company to qualify for Business Relief the company must carry on a business for gain.’
This is, to say the least, highly disingenuous on HMRC’s part. The Special Commissioner’s decision in Grimwood-Taylor primarily concentrated on whether various companies, the shares of which were owned by the deceased, formed a group. The Special Commissioner dealt with the issue of whether the businesses of the companies concerned were carried on for gain only cursorily in the last few paragraphs of his decision:
‘Mr Twiddy’s principal contention is that as the lands (namely the farm and Meadowbrook) were purchased for occupation by shareholders then the business of each of the companies in question, namely Nafisa and BBE, was carried on otherwise than for gain and falls within the exclusion contained in s 103(3).
Unfortunately, this contention by Mr Twiddy was hardly addressed at all by Mr Mallender. It appears to me that Mr Twiddy’s contention accords with the facts in this appeal.
The farm and Meadowbrook were certainly bought for occupation by the deceased and his parents and the accounts show that losses have mounted in the accounts of both companies for year after year. There is no evidence that the directors were concerned with profits: they were content to allow a loss-making situation to continue for many years. No evidence was produced that the companies carried on businesses in pursuit of gain and accordingly the appeals must fail, for I find on the facts that the businesses carried on by Nafisa and BBE were carried on otherwise than for gain.
The appeals fail and I uphold the validity of the notices of determination served on each of the executors and dated 8 July 1996.’
As the Special Commissioner noted the question of whether the companies concerned carried on a business for gain was hardly addressed at all by the taxpayer and there is nothing to suggest that any argument was advanced by either party as to whether it is necessary for a company to carry on a business for its shares or securities to be relevant business property within s.105. The Commissioner simply proceeded on the unspoken assumption that it must be so without explaining his reasons for making that assumption.
The proposition that ‘for shares in a company to qualify for business relief the company must carry on a business for gain’ can hardly be said to have been confirm[ed] by a decision, which is, in any case, not a binding precedent as it is a decision only of the Special Commissioners, in a case in which the proposition was not the subject of any argument and in which it was never expressly articulated.
Practical application
Taking account of HMRC’s aggressive attacks on tax planning and the wayward approach to construction often adopted by the modern courts it would be a brave, indeed a foolhardy, taxpayer who relied on this construction being correct in planning his transactions. Taxpayers should, however, take it into account that it is the natural, literal construction of the legislation and one which might be accepted by the Courts. In particular, in respect of transactions which have already taken place but the IHT effects of which have not yet been finally determined, it is an important additional argument in the taxpayer’s armoury.
