Enter Your E-mail

Matthew Hutton MA, CTA (fellow), AIIT, TEP, author of Monthly Tax Review (MTR), highlights HMRC's view on the application of Inheritance Tax Business Property relief in a group context. 

Matthew Hutton

Context

Paul Preston at Friend LLP has drawn to my attention a particular analysis by HMRC of the effect of IHTA 1984, s 105(3) in the Shares Valuation Manual at SVM 27610.

Group situations: what the SVM says

Subject to the paragraphs below relating to s 111, the only grounds on which relief may be denied under s 105(3) are if the business of the holding and subsidiary companies viewed as a whole does not fall within s 105(4)(b). The test is a factual one. Accordingly, the activities, income sources and asset values of the parent and each of its subsidiaries must be examined to form a picture of the group business.

Example

Company A is merely a holding company with two subsidiaries, B and C. B deals in land and buildings and carries out a minor activity of building and construction. Company C is an investment company with a large portfolio of quoted securities. The group viewed as a whole does not qualify for relief under s 105(3).

Section 111

Even where the shares or securities in the holding company qualify for relief under s 105(4)(b), s 111 provides an important restriction to relief if the business of any of its subsidiaries falls within the excluded class (eg wholly or mainly investment). In this case, BPR is available on what the value of the shares in the holding company would have been if the non-qualifying subsidiary(ies) was/were excluded from the group. It should be noted that it is not normally correct to apportion the agreed value of the shares in the ratio that qualifying and non-qualifying assets bear to one another.

The restriction does not apply where:

• the business of such a subsidiary consists wholly or mainly of being a holding company of other companies with businesses not falling within the excluded class, or
• its business consists wholly or mainly of holding land or buildings wholly or mainly occupied by another member of the group - provided that member does not have a business within the excluded class or satisfies the holding company test.

Disregarding the Legislation?

My grouse with HMRC’s analysis is the bold assertion that, subject always to s 111, the only grounds on which relief will not be forthcoming under s 105(3) are if the business of the holding and subsidiary companies viewed as a whole does not fall within s 105(4)(b).  Certainly I agree with the analysis given in the immediately following example, but not for the reason given.  The business of company A is excluded from relief by s 105(3), which itself is not disapplied by s 105(4)(b).  Neither provision has any reference to the concept of viewing the group ’as a whole’.  Section 105(4)(b) provides simply that s 105(3) does not apply to (broadly) shares of a company if the business of the company consists wholly or mainly in being a holding company of one or more companies whose business does not fall within s 105(3).

Assume therefore that you have a holding company, the shares in which prima facie are relevant business property, viz that the business of the holding company consists wholly or mainly in being a holding company of one or more companies which do not fall within s 105(3).  Section 111 goes on to provide the limitation that if there is any other group company whose business is within s 105(3), then (subject to two exceptions) the shares of the company shall be excluded from the value attracting BPR.  The two exceptions are (a) that the business of that other company itself falls within s 105(4) as being a UK market maker or discount house or a qualifying sub-holding company and; (b) that its business does not consist wholly or mainly in holding land or buildings wholly or mainly occupied by members of the group whose business in broad terms is a qualifying one for BPR purposes.

Application

It seems to me that HMRCs expression ‘as a whole’ is over-simplistic, albeit no doubt prompted by the words ‘wholly or mainly’ in s 105(4)(b).  The required steps seem to me to be as follows:

1.  Subject to the exceptions in 2. below, shares in a holding company are not relevant business property (s 105(3)).

2.  The exceptions are:

(a) property is not excluded from being relevant business property if the business is wholly that of a UK market maker or discount house; and

(b)  shares will be relevant business property if the business of the company consists wholly or mainly in being a holding company of one or more non-s 105(3) companies. 

3.  If any of the group companies is itself a s 105(3) investment company, its value is (with two exceptions) excluded from BPR (s 111).

That is why the ‘further bizarre effect’ suggested by John Tallon in MTR (7/07) seems to hold good (subject to the obvious caveats he makes).  There the shares in Holdco are worth £1,000, apportioned (on an assets basis) as to £510 to a 100% holding in S and £490 to other investments.  In turn S (worth £510) is mainly trading (say £260) but also has investments worth £250.  Because Holdco’s main business is holding shares in S which itself is wholly or mainly a trading company, 100% BPR would seem to be given on assets worth £1,000 in total, of which £740 are investments.  One does not need in this example to go on to s 111.

HMRC’s ‘anomaly’

The legislation leads to an anomaly with which valuers should be familiar. Shares in a company which has no subsidiaries, which is mainly engaged in trading but carries on a minor business of making or holding investments will qualify for relief in full. However, if the investment business were carried on by a wholly-owned subsidiary of the trading company, and the investment business was carried on as the principal activity of the subsidiary, relief would be restricted by s 111. This is illustrated in the following examples.

Example 1

Company A Is a holding company with two subsidiaries, B and C. B is an engineering company and C deals in land and buildings. Relief is restricted to that part of the value of A which is attributable to the trading activity (i.e. B).

Example 2

Company A is itself mainly an engineering company with a minor activity of dealing in land or buildings. The assets solely attributable to the latter activity are not excepted assets under s 112(2) - see SVM27650.  Section 105(3) will not be in point so that relief will be given In full.

Example 3

Company A has two subsidiary companies B and C. B is wholly an engineering company. C is mainly engaged in engineering but also carries on a minor business of dealing in land and buildings. In this example relief on company C cannot be denied under s 111. Nor can relief be denied under s 112 on company C’s minor activity of dealing in land and buildings (see Example 2 and SVM27650)

Valuers will not necessarily be able to make a judgment as to whether any subsidiary requires to be left out of account under s 111 on the basis of consolidated accounts alone. It is a matter of judgment whether it is necessary to call for all subsidiary accounts in a particular case.

Cases will arise where there are intermediate subsidiary companies.

Example 4

Company A has two wholly-owned subsidiaries, Company B and Company C. Company B itself has three wholly-owned subsidiaries: Companies D, E and F. For the purposes of s 111 Companies D, E and F will each be regarded as subsidiaries of Company A.

If all the companies in the Group were trading except for Company F which was wholly engaged in making or holding Investments, Company F would need to be taken into account in calculating a restriction of BPR. Whether shares in Company A would qualify under s 105(3) would depend on a consideration of the facts, as would the treatment of Company B.

This is not a straightforward subject. In all cases HMRC’s officers are instructed to consider whether leaving subsidiaries of small value out of account would in fact affect the overall value. This is especially so in the case of minority holdings where the valuation may have been primarily based on the dividend or earnings stream. If it would not affect the overall chargeable value, or the effect would be marginal, there may be no point in proceeding with the point.

About Monthly Tax Review (MTR)

MTR is a 90 minute monthly training course, held in London, Ipswich and Norwich – as well as a reference work.  Each Issue records the most significant tax developments over a wide range of subjects (see below) during the previous month, containing 30 to 40 items.  The aim is not necessarily to take the place of the journals, but rather to provide an easily digestible summary of them and, through the six-monthly Indexes, to build up, over the years, a useful reference work. 

Who should come to MTR? Does it attract CPD?

MTR is designed not primarily for the person who spends 100% of his/her time on tax, but rather for the practitioner (whether private client or company/commercial) for whom tax issues form part of his/her practice.  Attendance at MTR qualifies for 1.5 CPD hours for members of the Law Society, for 1.5 CPD points for accountants (if MTR is considered relevant to the delegate’s practice) and (subject to the individual’s self-certification) should also count towards training requirements for the CIOT.  For STEP purposes, MTR qualifies for CPD in principle, on the grounds that at least 50% of the content is trust and estate related.  
 
How is MTR circulated?

The Notes are emailed to each delegate in the week before the presentations (and thus can easily be circulated around the office), with a follow-up page or two of practical points arising during the various sessions (whether in London, Ipswich or Norwich).

How do I find out more?

For further details, and for those whose firms unable to make the monthly seminars but wishing to order MTR as 'Notes Only' (at £180 per annum for the 12 issues, invoiced six-monthly in advance), visit http://www.taxationweb.co.uk/taxevents/monthly_tax_review.php