Business Property Relief and shares left to trust

Trusts Discussion
1

I am a tax adviser, rather than a lawyer and have been speaking to a prospective client. The husband owned shares in a trading company up to his death last month. The company has substantial cash reserves, so that there is a risk that HMRC will not agree to the full Business Property Relief being available on the share value.

The Will leaves property that qualifies for Business Property Relief to a trust with the remainder of the estate to the widow. I haven’t seen the will so don’t know the exact wording

If HMRC were to exclude part of the value of the shares from BPR does that mean that the whole gift into trust fails? Would it be possible to transfer a proportion of the shares to match the value that HMRC agreed was eligible for BPR?

Any help would be welcome.

2

It depends on the wording in the Will, but usually Wills contains a specific gift of business assets that qualify for relief to pass into trust, so the executors and trustees have the ability to transfer a portion of the shares into trust, so as to avoid triggering any inheritance tax liability.

Ihsan Ali
I Will Solicitors Ltd

3

Hi Paula,

On the assumption BPR fails/_

IHTA 1984 s112 would prevail here, the excepted assets (the cash) would be excluded from relief to BPR.

The shares (value for IHT purposes = assets - excepted assets) and could still be settled into the BPR trust.

The excepted assets would now sit in the potentially chargeable estate. It might be an idea to vary these to the spouse so as to obtain a IHT exemption.

Richard C. Bishop
PFEP

4

You can’t separate the value of the underlying excepted assets from the rest of the value of the shares. The way s112 IHTA works is to deduct from the total value of the shares transferred that part of the value attributable to “excepted assets”. Only the balance of their value then qualifies for BPR.

When the property transferred is shares in a company you cannot separate these into eligible and non-eligible shares. Their total value has to be apportioned, so logically that would apply to the value of each and every share. But there is a major problem where the shares are not valued on a net asset basis; indeed the value of a minority interest may be totally unaffected by asset backing. The statute and IHTM make no comment about this at all.

It must be arguable that No Value is attributable under s112(1) but that will be a question in every case for the necromancy of the share valuation process. A minority shareholding will usually be valued on a P/E basis with a nod to dividend history if relevant; it will not normally permit the hypothetical purchaser to unlock the underlying net asset value and even where a controlling holding is involved 75% would be required to liquidate unilaterally. The actual share rights could be crucial: they might entitle the holder to sell to anyone at fair value (perhaps after offering round to members) and even then to force other shareholders to sell also (“drag along rights”). Pre-emption provisions (in Articles or a shareholders’ agreement which would bind a purchaser) are taken into account in valuation, because the hypothetical purchaser’s price depends to some extent on his ability to realise his shares in future per those same provisions. In an appropriate case the asset stripper, always theoretically part of the market, may not even be a special purchaser of shares in a particular company e.g. one with poor earnings and dividend record but with significant undervalued assets.

Great care is needed as to what the will actually says. A gift of “property subject to business relief” might still be a valid gift of all the shares even if their value eligible for BPR was limited under s112, perhaps contrary to the testator’s intention that their value would be fully relieved. This is a matter of construction of the Will and an issue may arise as to whether or not the drafter of it accurately encapsulated that intention. Though possibly neither of them understood how s112 could operate in practice.

Jack Harper

5

Thank you for responding Bish, I agree with your analysis, and in an unincorporated business it would be easy to transfer the P&M, Goodwill, working capital etc to the trust, whilst leaving behind the yacht, Rembrandt, private plane, etc. However, when it comes to shares is it really that simple? Surely each share carries a mix of entitlement to both qualifying and non qualifying value because the share is a share of the overall value of the company without any specifics in the company Mem and Arts. Does that then mean that none of the shares can be passed to the trust because each will carry non qualifying value?

6

It will depend upon the terms of the gift in the will.

For example, if the will defined “business property” as any asset to which 100% BPR applies, then any asset that qualifies other than for 100% BPR cannot be within that gift. It is an “all or nothing” scenario.

If, however, the gift is, say, an NRB gift of assets subject to BPR, I believe that only sufficient of the assets with a non-qualifying value equal to the available NRB would go into the trust. If there is a mix of fully and partially qualifying ssets, the executors will need to consider which should be within the gift (hopefully the will might contain some guidance in such a situation).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

7

The shares and the assets of the company are two different entities - the shares have “rights” typically to dividends, voting and winding-up.

Shares BPR
On the basis the shares qualify for BPR

(A). The company does not consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments.

IHTA 1984 s.105 Relevant business property.
It should be noted here the fact the company may hold assets that are BPR non-qualifying or only qualify for 50% BPR this does not mean the shares cannot be placed into the BPR trust. The main criteria is (A).

Example
Widgets Ltd is owned by Mrs. Smith 100% - the Ltd owns a building which it trades from. Mrs Smith dies and leaves 100% shareholding to her husband via a BPR trust- the fact the building only receives 50% BPR does not restrict the shares being placed on trust.

On the assumption the company meets IHTA1984 s.105 the shares can be settled into the BPR trust. It’s important to note here the “shares” are now in the BPR trust - not the assets of the company!

Although the “shares” may qualify for BPR 100% - this does not mean the company has no liability to IHT based on it’s assets, (cash-loading) and valuation (however that is calculated).

Richard C. Bishop
PFEP

8

It would be helpful Paula if you could set out exactly what the Will clause actually says.

Just because an unquoted company owns “excepted assets” does not mean that technically its shares do not qualify at all for BPR. This is provided the excepted assets are not so significant in value that they disqualify the entire company and thus all of its shares.

That will be so only if “the business carried on by the company consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks or shares, land or buildings or making or holding investments” but can include a holding company of one or more companies that are not themselves ineligible: s105 IHTA.

Unfortunately s112 (1) states only in principle that “In determining …what part of the value transferred by a transfer of value is attributable to the value of any relevant business property so much of the last-mentioned value as is attributable to any excepted assets within the meaning of subsection (2) below shall be left out of account.” What it does not say is how it is to be left out of account and nor does IHTM25341-4 or SVM111210-50, so we have no precise HMRC guidance.

Where the shares are to be valued on a net asset basis there should not be a problem, as there generally is not with an unincorporated business. The value of the shares will simply be apportioned between the value of the underlying assets of each type. There can be sometimes an issue of which part a liability relates to.

The difficulty arises where the shares to be valued are not, or not entirely, to be valued by reference to its assets but instead by reference to its earnings and dividend history. The value of its underlying assets, excepted or not, plays no part in the valuation of the shares. All HMRC say in SVM111250 is " Because of the diversity of circumstances of valuation, it is not possible to lay down detailed rules as to the calculation of that part of the value transferred to be left out of account in determining the value of relevant business property. The answer lies in a fair and even-handed approach to the calculation of the difference between the value of the shares arrived at with the excepted asset included in the company and the value with the excepted asset excluded" and “Decisions in this area need to be commercially sensible and realistic and bear a measure of consistency with the means adopted for the valuation of shares.” So they get the problem but they are not prepared to consider it save in arriving at a view in each case as part of the share value negotiations.

There must be a strong argument that where a parcel of shares is to be valued on an earning basis no part of the value of the company’s underlying assets can be attributed to their value! This may be a "fair and even-handed approach! You do not say what percentage holding you are dealing with, let alone the actual rights if they are not a 100% holding.

If the will clause clearly directs that the shares are to enter the trust if they are eligible for BPR there is nothing optional about it and you cannot split them into some that are and leave out those that aren’t. It is common for shares that qualify for BPR to be left away from the surviving spouse into a DT because their value will not be charged to tax in the estate and so will not need the spouse exemption.

If your testator been advised (was he?) of the possible effect of excepted assets in the company on the value of the shares bequeathed, making the transfer of value partly chargeable, there may be a possibility of rectification, or of a variation or a s144 appointment in a DT in favour of any surviving spouse, if in time and preferred by those who wish it or at least with no objection by anyone who has a legal right to make it. If the testator was not advised and should have been then someone may be liable and need to write to their insurers. To overlook the point altogether is a basic error and the testator should have at least have been advised about the above discussion and any uncertainty attaching that might only be resolved by dealing with SAV.

Jack Harper

Paula_Sparrow:

Does that then mean that none of the shares can be passed to the trust because each will carry non qualifying value?

The shares and the assets of the company are two different entities - the shares have “rights” typically to dividends, voting and winding-up.

Shares BPR
On the basis the shares qualify for BPR

(A). The company does not consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments.

IHTA 1984 s.105 Relevant business property.
It should be noted here the fact the company may hold assets that are BPR non-qualifying or only qualify for 50% BPR this does not mean the shares cannot be placed into the BPR trust. The main criteria is (A).

Example
Widgets Ltd is owned by Mrs. Smith 100% - the Ltd owns a building which it trades from. Mrs Smith dies and leaves 100% shareholding to her husband via a BPR trust- the fact the building only receives 50% BPR does not restrict the shares being placed on trust.

On the assumption the company meets IHTA1984 s.105 the shares can be settled into the BPR trust. It’s important to note here the “shares” are now in the BPR trust - not the assets of the company!

Although the “shares” may qualify for BPR 100% - this does not mean the company has no liability to IHT based on it’s assets, (cash-loading) and valuation (however that is calculated).

Richard C. Bishop
PFEP

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Previous Replies
It will depend upon the terms of the gift in the will.

For example, if the will defined “business property” as any asset to which 100% BPR applies, then any asset that qualifies other than for 100% BPR cannot be within that gift. It is an “all or nothing” scenario.

If, however, the gift is, say, an NRB gift of assets subject to BPR, I believe that only sufficient of the assets with a non-qualifying value equal to the available NRB would go into the trust. If there is a mix of fully and partially qualifying ssets, the executors will need to consider which should be within the gift (hopefully the will might contain some guidance in such a situation).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals