Mark McLaughlin looks at inheritance tax business property relief and highlights some issues and pitfalls that can apply to shares in unquoted trading companies.
Business property relief (BPR) offers inheritance tax relief at 100% (or 50%) for transfers of value attributable to relevant business property, where certain conditions are satisfied.
‘Relevant business property’ includes unquoted shares in a company, broadly where the business carried on by the company does not consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments.
Here are some practical issues for individual shareholders of such companies.
AIM listed shares
Shares listed only on the alternative investment market (AIM) are regarded as ‘unquoted’ for BPR purposes.
However, some AIM listed companies have secondary listings on recognised stock exchanges, which may deprive the shares of BPR status. It is, therefore, good practice to monitor the company. Also, check that the company’s business does not disqualify the shares from BPR.
Single company or group?
Shares in a group holding company are eligible for BPR, broadly, if the company’s business consists wholly or mainly of holding shares in one or more companies carrying on a business activity that is not wholly or mainly investment.
However, there is a restriction in relief if the business of any subsidiaries is wholly or mainly investment; BPR is then only available based on what the value of the holding company shares would have been if any non-qualifying subsidiaries were excluded from the group.
Shares in a company with no subsidiaries, which is mainly trading but carries on a minor investment business, qualify for BPR in full; whereas if the investment business was carried on by a subsidiary of a trading group and the investment business was the subsidiary’s principal activity, BPR would be restricted. This is an apparent anomaly in the BPR rules.
Control of the company
If an individual holds shares in a company which constitute relevant business property, and also owns land or buildings, machinery and plant used wholly or mainly by the company, a gift of that asset can obtain BPR at 50%, but only if the shareholder has control of the company.
Helpfully, in determining whether a person is deemed to ‘control’ a company, any shares that are ‘related property’ are considered. ‘Related property’ includes property comprised in the estate of a spouse (or civil partner).
Gift followed by share sale
A gift of shares might be followed shortly afterwards by a sale of the company. An anti-avoidance provision easily overlooked concerns ‘binding contracts’. BPR is generally denied on a transfer of value of the shares if a binding contract for their sale has been entered into at the time of the transfer.
However, there are certain exceptions to this general rule. One such exception relates to transfers of shares or securities where the later sale is made for the purpose of a company reconstruction or amalgamation.
Practical tip
Care is needed on a sale of the shares. For example, if a chargeable lifetime gift of shares (e.g., into a family discretionary trust) is made on which BPR is claimed, and this is followed shortly afterwards by a sale of the company, HMRC might seek to establish whether there was a binding contract for the sale when the gift was made. HMRC’s Inheritance Tax Manual (at IHTM25291) instructs its officers to investigate such circumstances to check whether BPR is due.
