Business property?

Does a holding in a company that is not a subsidiary preclude the availability of IHT business property relief and is the answer to run the “hybrid business” argument? Terry Jordan answers a query for Taxation magazine.


Is the value of shares in a subsidiary eligible for business property relief?

I am an officer and the controlling shareholder of a company, X Ltd. A few years ago the company entered into an agreement with an individual software developer and we have developed a successful piece of software.

The intellectual property (IP) is held in a company, Y Ltd. The developer holds 50% of the ordinary share capital of Y Ltd and X Ltd holds the other 50%.~

X Ltd markets and sells the software and pays royalties to Y Ltd, which pays a salary to the developer and dividends are paid out periodically. There are no family connections and all agreements are commercial. X Ltd continues its original trade as well.

It has been suggested to me that inheritance tax business property relief on the share capital in X Ltd may be denied because the investment in Y Ltd (not a group company) is only 50% under the wholly and exclusively test.

I have read the relevant legislation and see the problem. However, I believe that the holding in Y Ltd should be considered a trading asset and not an investment; X Ltd is simply holding 50% of the IP via a company thus enabling a successful trade.

If the arguement has no merit, is there a solution to avoid a forced sale of the company to pay inheritance tax on my death?

Query 18,484 – Business Owner

Reply from Terry “Lacuna” Jordan, BKL

Business Owner has in excess of 50% of the shares in X Ltd. From the description of the activities of X Ltd, and disregarding its holding in Y Ltd, inheritance tax business property relief would not apparently be precluded by IHTA 1984, s 105(3).

Because X Ltd’s holding in Y Ltd is not more than 50% the get-out in s 105(4)(b) is not in point. “Holding company” has the same meaning as in Companies Act 2006, s 1159 and Sch 6.

HMRC might be expected to take a firm line in such circumstances based on the wording of the legislation as they have in denying relief where the holding entity is a partnership or a limited liability partnership, rather than a company – see A merry dance by James Kessler and Oliver Marre.

However, that might not be the end of the story. It may be possible to argue that X Ltd, as long as it is predominantly “trading”, is running a hybrid business that includes its investment in Y Ltd. The commentary in HMRC’s Shares and Assets Valuation Manual at paragraph  SVM111220 is helpful:

“Having regard to the term ‘business concerned’ (IHTA 1984, s 112(2)(a)), you will need to consider the nature and extent of the company’s business operation. If it has trading and investment interests, you will need to consider whether the latter is part of a hybrid business activity.

If you conclude that a hybrid company is mainly trading and that business relief is not precluded under s 105(3), the ‘excepted assets’ rules will not apply for investments constituting part of the hybrid business. The ‘excepted assets’ rules can only apply to assets which are not used in either part of the hybrid’s business.”

There is no guarantee of success, but I would suggest that this argument is the one to pursue here.


This article is also available on the Taxation website.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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