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Matthew Hutton MA, CTA (fellow), AIIT, TEP, author of Monthly Tax Review, highlights a planning point on Business Property Relief for Inheritance Tax Purposes, and some bizarre effects of the rules. 

Matthew Hutton

Key Features

As directed by IHTA 1984, s 103(2), The meanings of ‘holding company’ and ‘subsidiary’ are found in CA 1985, s 736 (IHTA 1984, s 103(2), now in CA 2006, ss 1159 & 1160 and Sch 6).

Relief for value of shares in a holding company:
 
- not precluded by s 105(3) if its business consists in being a holding company of one or more companies to which s 105(3) does not apply (s 105(4)(b)).

- A reduction must be made if it has an investment subsidiary (or land or share dealing subsidiary), unless the business of the subsidiary consists wholly or mainly in holding land/buildings occupied by other group companies not falling with s 105(3) (s 111). 

A judicious mixture of activities within a group structure offers the prospect of achieving 100% BPR without offending:

- either s 105(3)
- or s 112 (‘excepted assets’).

Bizarre effects – Contrast three scenarios

1.  Holdco owns 49% of Xco (which has a business not prohibited by s 105(3)). 

Result: Xco is not a subsidiary of Holdco and the value of its shares counts as an ‘investment’.

2.  Holdco is a 49% partner in a business exactly similar to Xco.

Result: Holdco has a trade (or rather a share in a trade).

3.  Suppose now Holdco has the right to remove a majority of the Board of Xco with the consent of the other shareholders, but that no-one else has a similar right. 

Result: Xco is now a ‘subsidiary’ of Holdco in terms of CA 2006, s 1159(1)(b) & Schedule 6 para 3.

A further bizarre effect

The shares in Holdco are worth £1,000, apportioned (on an assets basis) as to £510 to 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. 

Result: S satisfies s 105(3) & Holdco satisfies s 105(4)(b). Therefore, a trading arm worth £260 supports 100% BPR in respect of investments worth £740. 

Comment

The above is of course in simplified form: one must stand back and look at the whole picture ‘in the round’.  Interestingly, unlike the situation on taper relief and the substantial shareholdings exemption from CGT (where HMRC’s stance is very prescriptive), no guidance is given as to how s 105(4)(b) should be applied.

(My conference on 20 June on Inheritance Tax 2007/08: Practical Solutions, lecture by John Tallon QC of Pump Court Tax Chambers)

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Matthew Hutton Conferences 2007

Matthew’s six round the country Estate Planning Conferences in September and October 2007 will be held on the following dates and at the following venues:

East - Thursday 6 September: Cambridge Belfry Hotel, Cambourne CB3 6BW           

North - Wednesday 19 September: Tankersley Manor, South Yorkshire S75 3DQ          

Midlands - Tuesday 25 September: Woodland Grange, Leamington Spa CV32 6RN            
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South - Wednesday 17 October: Norton Manor Hotel, Sutton Scotney, nr Winchester SO21 3NB

London - Wednesday 31 October: New Connaught Rooms, London WC2               

The subject matter has yet to be finalised, although brochures will be available in June.  The cost is £295 plus VAT per delegate or for those who have attended a previous Matthew Hutton Estate Planning Conference £270 plus VAT per delegate.

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