Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the availability of business property relief (BPR) for inheritance tax (IHT).
The tax query
‘I would be grateful for readers’ views on the availability of business property relief for IHT in the below instances.
A trading limited company whose business includes income from consulting and income from commercial and residential let properties. While on turnover the income from trading activity is about 40-50%, the balance sheet shows 85% or more of net assets are predominantly from investment activity. Though the business has been long established any value of shares attributable to goodwill developed from trading is likely to be low.
What is the position of a minority shareholder who is also a director in a trading company whose activity and assets are wholly derived from trading activity? The shareholder holds 30% of ordinary shares. Would they be eligible even though they do not have predominant control of the business?’ Query 20,431 – Investor.
Terry Jordan’s reply: BPR would be denied in this case
‘Investor seeks readers’ views on the availability of BPR in two scenarios. The first is a company with a mix of income from consulting and rent from commercial and residential properties. We are told that the income from consulting is 40-50% of turnover and the balance sheet shows 85% or more of value attributable to the investment assets. BPR is available to the value of shares in unquoted companies under IHTA 1984, s 105(1)(bb) (currently at 100% although under Labour’s proposals there is to be a ceiling of £1m of value at 100% and 50% thereafter from 6 April 2026). Tax practitioners usually talk in terms of the company needing to be trading to get the relief but strictly the test is whether s 105(3) denies relief because the predominant activities of the company consist of dealing in securities, stocks or shares, land or buildings or making or holding investments. Mixed businesses have been considered in HMRC v Brander (as executors of the will of the late Fourth Earl of Balfour) [2010] STC 2666 where it was held that the predominant activities did not fall within s 105(3). HMRC acknowledges that the company may constitute a hybrid business as set out in SAVM111220:
‘Having regard to the term ‘business concerned’ [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 to 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.’
It is necessary to consider the turnover, profit, capital values and directors’ time devoted to the separate activities to determine whether relief is available. In my view it would be denied in this case as the predominant activity is investment.
The second scenario is a shareholder/director owning 30% of the shares in a company with no investment activities. Relief would be available at 100% to the value of the shares which would be discounted to reflect lack of control. Prior to 6 April 1996 to get the then higher level of relief it was necessary to have more than 25% of the voting rights in a trading company and that requirement was abolished by the Conservative government.’
The full article was published in Taxation magazine (issue 4964) and is available to subscribers here on the Taxation website.
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