What is the correct IHT treatment of voting rights over unquoted shares held by trustees and does the nature of the trusts affect the answer? Terry Jordan examines this for Taxation magazine’s readers’ forum.
In 2004, our married clients, Mr and Mrs B, created four trusts, two each. The family trading business, which is valued at £48m, is owned as follows: Mr B, 25%; Mrs B, 24%; Mr B trust 1, 2%; Mrs B trust 1, 2%; Mr B trust 2, 23%; and Mrs B trust 2, 24%.
This year, we have been asked to prepare the 10-year anniversary inheritance tax returns for the trusts.
The four trusts have two independent trustees and a third trustee who is the spouse of the settlor; that is to say, the two trusts settled by Mr B have Mrs B as the third trustee, and the two trusts settled by Mrs B have Mr B as the third trustee. The trusts are not settlor interested. We are confident that business property relief will negate any tax charge. However, we wish to be diligent in our valuation of the assets in each trust and to advise the family of the tax charge that may arise if this relief is restricted.
The valuation of the business as a whole at £48m is agreed, but we are having difficulty over the amount of the discount that could be applied to each trust’s shareholding. In particular, does Mr B’s involvement in his wife’s trusts’ as settlor amount to control (25% + 2% + 24% = 51%), even though each trust has a minority shareholding only?
Query 18,505– Trusted Adviser
Reply from Terry “Lacuna” Jordan, BKL
Mr and Mrs B have divided the family company into personal holdings as advised, but we are not told whether the four trusts are discretionary or interest in possession.
We are told that the trusts are not settlor interested and the implication is that neither Mr B nor Mrs B is a beneficiary under the terms of any of the trusts.
Under IHTA 1984, s 269(2), shares that are related property under IHTA 1984, s 161 are to be included for the purpose of determining who has control of the company. Accordingly, Mr and Mrs B’s personal holdings are aggregated and between them they have 49%, so do not exercise control.
In the context of settled property, and for the purposes of the control test, s 269(3) deems the voting rights to belong to “the person beneficially entitled in possession to the shares…”. Note that it is not necessary for the beneficiary to enjoy an “estate” interest in possession.
In Walding and Others (Executors of Walding deceased) v CIR [1996] STC13, shares in the name of the deceased’s grandson, aged four, were not excluded from the overall calculation of votes, notwithstanding that, due to his age, he lacked capacity to exercise his voting rights. The capability of persons in whose name the shares were registered was not an issue and relief was denied to his late grandmother’s holding.
Accordingly, unless the same individual enjoys interests in possession in more than one trust the valuations should apparently be of Mr B’s 25% and Mrs B’s 24% as part of a 49% holding and each of the four trust holdings in isolation.