IHT - resi property and close companies

I wondered if anybody has considered this point re the apportionment of close company liabilities.

A (a non-dom) dies holding 100% of JerseyCo.
JerseyCo holds £2m of cash and 100% of company B. Company B just holds a £2m UK property bought with a £1m mortgage. The value of company B is therefore £1m.

Under IHTA Sch 1A, para 2(5), liabilities of a close company are apportioned between all the assets of the close company. If JerseyCo held the property directly, the £1m mortgage debt would be apportioned between the property and the cash with the result that only half could be set against the property and £1.5m would be subject to IHT.

Q: Does the actual situation allow the full mortgage to be set against the value of the property (because company B has no other assets) or does para 2(5) operate on a group basis.

I don’t think there is any justification for the group basis but it seems too simple a solution to the apportioning problem. There are good (non-tax) reasons for having two companies so the TAAR should not apply.

Andrew Goodman
Osborne Clarke LLP

Para 2(5) is in effect a deeming provision and such provisions can cut both ways. I note it (apparently) overrides the usual rule that secured liabilities go to reduce the value of the property they are secured against.

I am not aware of any guidance to cover the specific situation to which you refer and in the absence of anything else on the topic I would say you just apply the words of the legislation to the situation you face, in the way you describe.

Paul Davies
Clarke Willmott LLP

Many thanks. It is unfortunate that none of the commentators or professional bodies appear to have considered the point (or perhaps did and didn’t consider it an issue).

Andrew Goodman
Osborne Clarke LLP

It is the interest in JerseyCo which needs to be valued for IHT purposes. In determining such value Sch A1 para. 2(5) provides “liabilities of a close company … are to be attributed rateably to all of its property…”.

The property of JerseyCo consists of its shareholding interest in company B and £2m cash. However, the liability of £1m is that of company B not JerseyCo.

The £1m is therefore applied exclusively against the UK property of company B.

There appears to be no legislative support for a “group basis” approach.

Malcolm Finney