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Matthew Hutton MA, CTA (fellow), AIIT, TEP, Presenter of Monthly Tax Review (MTR), highlights some planning points on inheritance tax business property relief by Alex McDougall and James Kessler QC from a recent IBC IHT and Trusts Conference.

Matthew Hutton

Context

The following points were made in a lecture by Alex McDougall and James Kessler QC at IBC’s IHT and Trusts Conference in London on 22 May 2008. 

Planning for BPR

Alex McDougall emphasised the importance of regular review.  Client assets should be examined to see if BPR would be available in the event of a death now and, if yes, what needs to be done over time to retain this.  Indeed, can the extent of the relief be increased, eg by adding non-relieved value to the value of the business.  If not, what can be done to obtain relief?

Disqualifying Contracts for Sale

The rule in IHTA 1984, s 113 is well known, that BPR is denied in any case where the property is subject to a binding contract for sale.  However, Alex suggested that many old partnership agreements still gave to continuing partners a right to acquire the interest of a deceased or a retiring partner.  Consequent disallowance of BPR could so easily be avoided by instead structuring these as option arrangements.  In so doing, however, it was important to specify whether the price was market value or book value.  For example if one failed to specify book value HMRC would typically argue for market value for example to restrict APR to ‘agricultural value’ in a case where BPR was not available on the excess.  Second, if the beneficiaries were not also members of the partnership, HMRC would seek to argue for market value. 

BPR on Death

HMRC practice, advised Alex McDougall, was to start with the responses to IHT Account Form 200 and then to check the information given in the supplementary form D14.  There were helpful flowcharts in IHTM25022 to determine if BPR was available.  Although the content of this part of the Manual will have a change in focus following the current revisions the questions will not.  Once the Special Commissioner’s decision in McCall has become final further guidance is due. 

Deferred Shares

The use of deferred shares, passing value over gradually until such time as they came to rank pari passu with the ordinary shares, was especially in fashion before the advent of the potentially exempt transfer.  Maybe they would come back into vogue, in cases where 100% BPR was not available, where it was desired to settle shares in investment companies under the FA 2006 regime for trusts.  HMRC published a curious interpretation of the application of IHTA 1984, s 98 in 1991 expressing the view that there was an alteration of rights caught by the section at such time when the deferred shares came to rank equally or become merged with the ordinary shares.  Most commentators felt that that was wrong.  However, it should be possible by drafting to avoid even that interpretation to ensure that there was a gradual shift of value from the existing ordinary to the deferred shares over a period of time, suggested James Kessler QC. 

(Alex McDougall and James Kessler QC lecture notes 22 May 2008)

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Audience:  Solicitors  Accountants  Tax Advisers  Private Bankers 

Estate Planning continues to be an intriguing and interesting subject.  But it is no mere intellectual exercise.  For our clients, the advice we give and the decisions they make, if not exactly 'life or death', can have far-reaching consequences over a long period of time.  Decided cases and developing HMRC attitudes (with reference to the Manuals, especially) must both be taken into account.  Flexibility is essential in structuring the family assets. 

This series of Conferences will major on developments over the last year or so, putting them into context and drawing out the practical planning aspects.  There will be plenty of time for delegate questions and discussion.

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