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Anthony Nixon reports on the recent High Court decision in the Nelson Dance case, and considers the potential IHT implications for business owners.

Introduction

This briefing focuses on the new opportunity given to business owners to make inheritance tax-free gifts to the next generation, thanks to the recent Nelson Dance case.

Key points

• Sole traders and those in business in partnership have a new opportunity to obtain business property relief (BPR) from inheritance tax (IHT) on lifetime gifts;
• In most cases BPR is at 100% so provides complete exemption from IHT;
• It used to be thought that only gifts of actual businesses or interests in businesses obtained BPR;
• Nelson Dance establishes that the relief is also available for gifts of assetswhich were, immediately before the gift, used in the donor’s business;
• The particular case was about farmland with prospects for development;  the fact that the land was not to be used in a business in the future did not matter;
• IHT is a tax on the reduction in the total value of what a donor owns when he makes a gift, not on the value of the subject matter of the gift and, where a gift was an asset of a business, it is the reduction in the value of the donor’s business that obtains BPR;
• This is a particularly important opportunity for those with assets, currently used in a business, which may have a significant future value, because of development or other opportunities, who want to see the growth in future value outside their personal ownership to save IHT;
• A gift can be just of a part share in the asset, if the donor wants to keep part of the future gain in value for themselves;
• The Revenue may want, in the near future, to change the law to what they would like it to be:
• Gifts made before any change in the law is announced will almost certainly benefit from the Nelson Dance ruling.

Commentary

A few months ago a friend drew to my attention the taxpayer’s victory in the Nelson Dance case.  My initial reaction was that HMRC’s inevitable appeal would make it unsafe to proceed with planning in reliance on the Special Commissioner’s decision.

I was wrong.  Mr Justice Sales has heard HMRC’s appeal to the High Court and has ruled decisively in favour of the taxpayer.

The judge’s reasoning is well-ordered and entirely consistent with the IHT principle of taxing the ‘loss of donor’ rather than the matter of the gift.  HMRC may appeal again, but I believe that their changes of success are slim.

For many years, I have advised that sole traders obtain bpr only on a gift of ‘a business or interest in a business’ (IHTA 1984 s 105(1)(a)). I have advised that a gift which was merely of an asset used in a business got no BPR.

The High Court judgement points out that IHTA 1984 s 110 defines the value of a business as ‘the value of the assets used in the business’ less business liabilities.

If an asset used in a business is given away there is, almost always, a reduction in the value of the business.  It is that reduction that is the measure of the IHT transfer of value and the amount of that transfer of value that qualifies for BPR.

So it does not matter that the asset given away does not itself comprise a business.

In the Nelson Dance case the gift was of farmland with significant development value.  IHT Agricultural Property Relief relieves only the ‘agricultural value’ of farmland and not any development value that attaches to it.  Nelson Dance establishes that, whether or not the subject of the gift ceases to be used for the business immediately after the gift, the fact that it was an asset of the business before the gift qualifies for BPR.

The cynical among us will expect HMRC, if they fail to appeal successfully, to prompt the government to change the law.  HMRC usually claim that they are ‘restoring the position to what it was generally believed to be’.

Experience tells us that gifts made before the law changes are rarely affected by those changes.  So there is an opportunity now to make gifts from assets which are used in a business where, because of development opportunities, or for other reasons, those assets are not going to be essential for the business in the future.

If a donor wants to keep some of the prospective increase in value, a gift of a part share of an asset can get the same relief.  Provided care is taken there is no problem with reservation of benefit.

The availability of 100% BPR on gifts of this kind allows substantial gifts to be made to trusts, without immediate IHT.  This will be particularly useful where business owners want to set aside funds for the future benefit of the family, but want to retain flexibility, and perhaps control, as to who receives what assets when.