Will converting a loan account in an unquoted company to shares result in entitlement to IHT business property relief and does it matter how new shares are acquired when considering the minimum holding period of two years? Terry Jordan considers this for Taxation magazine’s Readers’ Forum.
A company owned by a father and daughter provides commercial loans and manages properties and collects rents. Activities include those carried out for family members and their businesses.
Our client company is owned by a father and his daughter. It has two principal activities, those being the provision of loans on a commercial basis and the management of commercial properties and collection of rents.
Both trades have been in existence for many years. The properties managed are either owned by: family members; family-controlled companies (not associated for the purposes of CTA 2010, s 25); or unrelated third parties. The company does not have any fixed assets of its own. Revenue reserves are about £1m.
As well as third-party lending, the company has made a sizeable loan to the daughter and various loans to the other family-controlled companies, all at commercial rates of interest.
Father has 95,000 ordinary £1 shares and daughter owns the remaining 5,000. Father has credit on his loan account of £700,000 and the company intends to issue 700,000 ordinary £1 shares by way of a rights issue to capitalise his loan account. There are also 12,000 preference shares in issue held by the father and the estate of his late wife.
We understand that property management and the granting of commercial loans are qualifying trades for inheritance tax business property relief (BPR). The conversion of a loan into further share capital seems an attractive way to create assets that will immediately qualify for 100% BPR.
Do readers consider that the shares in the company will qualify for BPR, notwithstanding that most of the loans and services are provided (at commercial rates) to companies controlled by family members and to family members in an individual capacity?
Query 18,365– Giveaway
Reply from Terry “Lacuna” Jordan, BKL
Inheritance tax business property relief at 100% is available on, among other things, the value of shares in unquoted companies under IHTA 1984, s 104.
Relief is denied by IHTA 1984, s 105 (3) if the company’s activities consist wholly or mainly of making or holding investments. The usual shorthand is to say that relief is available to the value of shares in “unquoted trading companies”.
The Phillips case (Phillips (Executors of Phillips Deceased) v HMRC [2006] STC (SCD) 639) is authority for the proposition that the provision of loan finance can constitute “trading” for these purposes.
As matters stand, the father’s loan account of £700,000 would not benefit from relief. The conversion of that amount into ordinary shares should mean that the latter benefits from business property relief if the money is required for future use in the trading activities of the business such that it is not an “excepted asset”, the existence of which could restrict relief.
The daughter would apparently be entitled to participate in the rights issue because she is an existing shareholder. As a result of the case of Vinton (Executors of Duggan-Chapman Deceased) v HMRC [2008] STC (SCD) 592, the shares taken up by the father in satisfaction of his loan account should immediately benefit from business property relief.
However, if he takes up shares renounced by his daughter they would have to be owned by him for two years before benefiting from relief.