I have a query regarding the application of Business Property Relief for a ‘hybrid‘ business
Assume a company, with a trading business, which owns both property occupied and used by the business plus, say, one property held as investment property
If that is all in one company however and the business element overall is at least 51% then, even though the investment property is otherwise an excepted asset that does not apply, as the whole is treated as a hybrid business
My query however is whether the hybrid business treatment applies or can apply to a group situation, e.g. one where the holding company owns all the properties but the trade is operated by a wholly owned subsidiary This is often the commercial structure to protect the property assets from any financial difficulties in the trade
Taken as a whole, it meets the hybrid business criteria, but it appears that, to qualify, the assets, including what would otherwise be an excepted asset, and the trade may need to be all within a single company
My query is therefore whether anyone has experience of claiming or, better still, obtaining hybrid business treatment for such a group structure, as, otherwise, if such a group does not qualify for hybrid business treatment, then the excepted assets provisions would otherwise apply to the investment property
Can anyone clarify the application of the approach adopted/ accepted, including from experience ?
Michael Jepson
M J Consultants
So long as the business of the holding company falls within IHTA 1984 s105(4), in that it’s business is mainly that of holding the shares in trading subsidiaries, it will not matter if it has an investment property.
IHTA s111 sets out the treatment of group companies for BPR and this allows one company to hold the properties occupied by other group companies which are trading. This can be either holding company or one of the subsidiaries. If such a company also holds an investment assets it will not affect BPR so long as its main activity is holding land or buildings occupied by trading members of the group.
Thanks for that confirmation Malcolm.
Following the statutory ‘logic’ however, then in your view, does it mean that the parent company is treated as having a ‘business’, through holding property occupied by the subsidiary trading company, so that its ‘ business’ is treated as a ‘hybrid business ‘, and that, provided that the investment property element is less than 50% of the value of the trading properties owned, plus the shares in the subsidiary, then it gets full business property relief, or is it that the whole group and its subsidiaries trade are treated as one business of the Holding Company for the hybrid treatment ?
Michael Jepson
The main business of the parent company will normally be the holding of shares in subsidiaries. Were it not for IHTA 1984 s 105(4) (b) that would be an investment business not qualifying for BPR. If the parent company also holds the properties occupied by trading subsidiaries, IHTA s 112(2) means that this will not affect relief for the parent company.
I don’t see any possibility of looking at the group as a whole and attributing all activities to the parent. Instead IHTA 1984 s111 looks at each member of a group and denies relief in the holding company to the extent that its value is derived from subsidiaries which have mainly investment activity. However there is a let out under s111 for subsidiaries which either themselves have a main business of being the holding company of non-investment subsidiaries or alternatively have a main business of property holding for other non-investment subsidiaries.
If there are non-qualifying subsidiaries, ie those which are mainly investment businesses not available for relief by virtue of s111, they must be taken out of the valuation of the holding company in relation to any BPR claim.
All the tests involved for both holding company and subsidiaries are ‘wholly or mainly’. This means that investments can be tucked into any of the group companies without affecting BPR so long as this does not take them over the 50% threshold for investment activity.
Note also that the above applies only to subsidiaries, being those companies under the control of the parent. The holding company may have minority interests in other companies and if these are investment companies, section 111 does not apply. Instead it will be a question of whether the minority interests are excepted assets (IHTA 1984 s112) and they may not be if it is shown that they are held for the business purposes of the parent.
I agree with Malcolm that, on the basis that the business of the holding company is wholly and exclusively that of a holding company, then it would be treated as a hybrid business to include other lesser overall value investment assets or cash in the relief.
What is not clear however is whether it could be argued that, where the holding company owns the properties used in the group businesses, plus an investment property, then does the holding company have two businesses i e that of a holding company of qualifying subsidiaries under s 105 (4) (b) and the other that of holding land and buildings per s111(b), Holding property is itself a ‘business’ and described as such in s105(3) and(4).
However, on a separate argument, where it does qualify, is that latter activity treated as part of the business of a holding company where the holding company owns the properties, so, on that basis, there would still only be one business for BPR purposes. The problem otherwise would be whether there are effectively two ‘businesses’ in the parent’ and if so, which one is the ‘wholly or mainly business’ or indeed is there then no ‘wholly or mainly‘ business at all in that case (There is also a possible a separate technical argument under s112(2) that that subsection treats the property held and used for the trade as part of the business of the trading subsidiary using the property )
If the above ‘two businesses’ concern might be a problem, then the answer could be for the Holding Co to establish a new property subsidiary and hive down, at cost, the trading properties to that subsidiary, but retain the investment property in the H Co. The only business of the H Co would then be wholly or mainly that of a holding company and the subsidiary’s property would fully qualify under the joint effect of s111 and s112(2)
There would be a substantial loan account in the holding company however but that would surely not be an excepted asset given that it is represented by a loan to a subsidiary to purchase qualifying property.
Michael Jepson
I think the particular issue mentioned is covered by the general principle that investment activity within a mainly trading company does not affect the BPR position. The company does indeed have two businesses, one trading and one investing, but the investment business could only be taken out of the relief via the excepted assets provisions. But those provisions do not operate where the investments are held as a business activity (IHTA 1984 s112(2)a). Note that the ‘business concerned’ referred to in that subsection does not have to be a trading business.
The same principle applies to a holding company within IHTA 1984 s 105(4)(b).
Identifying the main business of a hybrid holding company could be troublesome where the investment activity is substantial and the best advice is to ensure that the investments are safely below the level where they could cause loss of all relief. They could instead be spread around the trading subsidiaries.
As regards loans by the holding company to trading subsidiaries HMRC accepts that these do not prejudice the relief for the shares in the holding company.