Replacement Business Property

by **benjam1n** on Thu Nov 10, 2011 6:14 pm

I understand the mechanics of S107 IHTA 1984 i.e. the ownership of replacement business property may be aggregated with the old business property, provided 2 years of the previous 5 qualify for BPR

But, the way I interpret IHTM25314 http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm25314.htm suggests that S107 will not apply to instances where the old and new business property are unquoted trading company shares, unless the ownership of them shares can be linked through a reorganisation as per S126-136 TCGA 1992

In my scenario, I have a client (new client I would add) with £2m cash following the sale of his company. Immediately wants to gift the cash into trust for the benefit of his children and grandchildren - why the previous advisers did not suggest putting the shares into trust (other than the property may have fell foul of S113) I do not know. My new client has fallen out with his previous advisers - they forgot to advise to make his 20% shareholder spouse an employee or director, so she missed out on ER.

Anyhow, to avoid paying lifetime IHT on this gift of value to trust, am I able to suggest the client invests the £2m cash into AIM listed shares, and transfers these shares immediately into trust with 100% BPR by aggregating the ownership with the old shares?

The AIM listed shares would then be sold within a short period after the transfer. I am aware the add back of BPR on any death within 7 years of the gift.

Thank you for any responses in advance.

Ben

by **tax_schmax** on Fri Nov 11, 2011 1:15 pm

You are able to use replacement relief to buy further qualifying assets, such as AIM, and subsequently settle these into trust as exempt assets, thereby avoiding the charge for a CLT. There are alternatives to AIM that you should consider. Usefully, there are less volatile and more liquid options reduce the risk for the settlor / trustees. I'd rather not advertise specific companies here but I use three or four that might be worth a look.

Could you also clarify what "old shares" you are talking about when you mention aggregating them. Your post reads as if there are no shares owned by your client and he just has the cash from selling them. If there are shares, a restructure into an LLP might be necessary.

by **benjam1n** on Fri Nov 11, 2011 3:31 pm

Thanks for your reply.

My client sold the shares in his unquoted personal trading company, say 2010, and now has cash. Regard this as company A.

He now wants to transfer the cash into trust.

In order to avoid the lifetime tax I want to suggest converting the property back into business property, i.e. AIM listed shares - say company B, and then transferring the company B shares into trust, say during 2011, obviously then without holding it for two years, but by making use of S107 to aggregate the period of ownership of B with the period of ownership of A, so the 2/5 rule is met

Once in trust the shares would be sold almost immediately to avoid the volatile AIM market. I am aware of the add back of BPR should the transferor dies within 7 years and the business property, or replacements, is no longer held by the transferee.

Company A and company B in this scenario are no way connected through any reorganisations. There will be two completely different companies.

by **benjam1n** on Fri Nov 11, 2011 3:36 pm

So my question was, does the ownership of the company B shares need to be as a result of a reorganisation of company A as per that HMRC manual extract I supplied, for S107 to apply?

by **tax_schmax** on Fri Nov 11, 2011 6:24 pm

No. I don't think it does. I read the restrictions applying to increases in the value of the replacement property compared to the original property that created the relief. If your client is adding funds to the proceeds of sale, relief would be restricted as per IHTA84/s107 Sch.10 para.4(2). If he is investing the proceeds and no more, I can't see a problem.