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Busy Practitioner by Mark McLaughlin ATII TEP

Mark McLaughlin CTA (Fellow) ATT TEP, General Editor of TaxationWeb, highlights a Special Commissioners decision and other recent developments concerning Inheritance Tax.Recent inheritance tax (IHT) developments of note include a Special Commissioners decision involving business property relief (BPR) and qualifying business activities, and changes in law affecting excepted estates for IHT purposes.

An investment business?

In Phillips and others (Executors of Rhoda Phillips Deceased) v Revenue and Customs Comrs SpC 555, the Special Commissioner allowed an appeal against a determination by HMRC rejecting a claim for BPR on shares in a company which lent money to related family companies.

Shares are not eligible for BPR if the business carried on by the company consists wholly or mainly of certain activities, including making or holding investments (IHTA 1984, s 105(3)). The company, PP Investments Ltd, lent money to related family companies. HMRC contended that this was an investment activity. The loans were informal in nature and repayable at will, with interest being charged at 2.5 per cent above base rate. The Special Commissioner drew a distinction between the businesses of making loans and investing in loans, and considered that PP Investments Ltd fell into the former category.

HMRC also argued that the loans were investments because the borrowing companies were mostly investment companies, and that they were in common ownership. However, one of the companies was an estate agency, which was a trading company. The Commissioner also considered that a loan was not made into an investment by reason of the companies being under common ownership and control, or by the loan being made to an investment company. Finally, the Revenue argued that the loans made by PP Investments Ltd were not made on the same terms as would be made by a third party. The Commissioner noted that the company took no security for the loans, and acknowledged that this approach differed considerably from any loan which might have been made to a third party. However, the difference in approach did not convert the business of making loans to the making or holding of investments.

In deciding the case in the taxpayers’ favour the Special Commissioner found assistance in another IHT case concerning BPR, IRC v George and another (executors of Stedman, deceased) [2004] STC 147, in which the taxpayers were also successful. That case concerned shares in a company which operated a residential caravan park and country club, and which sold caravans and stored touring caravans when not in use. Lord Justice Carnwath considered that the holding of property as an investment was only one component of the business, and was not the main one. He accepted on the facts that the company’s shares qualified for BPR, commenting that it was ‘…difficult to see why an active family business of this kind should be excluded from business property relief, merely because a necessary component of its profit-making activity is the use of land.’

Although the taxpayer was successful in the Phillips case, in practice there are unlikely to be many companies engaged solely in making loans to related parties. However, what about an existing trading company (e.g. a construction company) that separately receives interest on loans made to related companies? Would the making of such loans amount to a separate business, let alone a separate trade, or would the loans be an ‘excepted asset’ for BPR purposes? The answer would no doubt depend on the precise facts and circumstances, but the decisions in the Phillips and George cases may provide some assistance.

Excepted estates

Increases in the thresholds for excepted estates were introduced for deaths from 1 September 2006 (The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations, SI 2006/2141). In addition, following changes in the IHT rules on pension funds introduced in Finance Act 2006, provisions have been introduced to exclude the estates of those who die with ‘alternatively secured pension funds’ from being excepted estates, i.e. where new IHTA 1984, ss 151A, B or C apply on an individual’s death. The excepted estate thresholds are increased as follows:

• the cash limit for settled property is increased from £100,000 to £150,000 ;

• the cash limit for non-UK property is increased from £75,000 to £100,000;

• the cash limit for ‘specified transfers’ (e.g. cash, personal chattels, quoted shares or securities) is increased from £100,000 to £150,000; and

• the cash limit where the deceased was non-UK domiciled is increased from £100,000 to £150,000.

In their IHT Newsletter (August 2006), HMRC point out that IHT200 returns were submitted last year (around 5,500) for estates which qualified as excepted estates. However, simplified reporting applies to such estates (i.e. form IHT205, or form C5 in Scotland), and IHT200 forms are therefore inappropriate. HMRC admit in the Newsletter that their resources are pressured, to the extent that forms IHT200 submitted unnecessarily are given the lowest priority in their workload. This means that delays in dealing with such returns may therefore have a knock-on effect for personal representatives applying for a grant of probate (or confirmation as an excepted estate).

HMRC guidance

Finally, HMRC have published an updated ‘Customer Guide to Inheritance Tax’, which includes guidance on the IHT changes regarding trusts and pensions introduced in Finance Act 2006. The Guide can be accessed via the HMRC website: http://www.hmrc.gov.uk/cto/customerguide/page1.htm.

Mark McLaughlin CTA (Fellow) ATT TEP
September 2006

The above article is taken from ‘Busy Practitioner’, a monthly journal from Tottel Publishing. To order a subscription to ‘Busy Practitioner’, click here