I have been asked to assist with some tax planning and have been provided with a copy of the client’s Will, which includes the following:
5.1 I direct my executors to make over my interest that qualifies for Business Property Relief in “My trading group holding company Limited” or such other company representing the same to include any subsidiaries thereof together with the whole property, plant and machinery, stocks, contracts, book debts, bank or other accounts, goodwill and liabilities relating thereto as to all of which my executors shall be the sole judges, and subject to such discharges and indemnities as my executors may require in terms of the Shareholders Agreement dated…
5.2 I direct my executors to make over my interest that does not qualify for Business Property Relief in “My trading group holding company Limited” or such other company representing the same to include any subsidiaries thereof together with the whole property, plant and machinery, stocks, contracts, book debts, bank or other accounts, goodwill and liabilities relating thereto as to all of which my executors shall be the sole judges, and subject to such discharges and indemnities as my executors may require to my spouse.
The only shareholding in the estate is a 59% share in the group holding company, which is specifically named in the Will. One of the subsidiaries seems to qualify as a trading company, but may include excepted assets for BPR purposes, the other company owns residential property which is tenanted.
As a tax person I am looking at this thinking that the company shares will only partly qualify for BPR, and I am confused as to how the clauses operate for the personal representatives to split the shares between the beneficiaries nominated to receive shares qualifying for BPR and the spouse to receive the non qualifying shares. A share is a share of all of the company assets, you cannot separate out the BPR qualifying and non qualifying parts to allocate to specific shares.
As you suspect, the shares in HoldCo either qualify for BPR (as defined in the will) or they do not.
An executor would have to assess whether the shares qualify or do not, and distribute them accordingly. There would not be any division.
I would hope that the definition of “Business Property Relief” in the will covers whether only 100% relief qualifies under 5.1 and whether the presence of excepted assets would disqualify it. If not, there may be IHT to pay on any assets passing under 5.1.
As an adviser, this requires an assessment of whether holdco does qualify for 100% (or any) BPR, possible restructuring that might improve the position and, if not, a review of the will to confirm the definition of BPR and possibly to take into account the incoming £1m cap.
Thank you for taking the time, I do appreciate it.
The way Section 105 IHTA 1984 works is to look at the balance of overall activities of the holding company to assess what it is “mainly” doing. That is a gateway test to entitlement to BPR. Once qualification for BPR is established, Section 112 IHTA 1984 then drills down to the underlying assets and will exclude from relief the value of assets that are not wholly or mainly for the purpose of the company business. In my case, that removes the value of the rental property company from relief. If the value of the rental property company is 10% of the overall value, I can’t give 90% of the shares to the family trust and pass 10% to the surviving spouse without generating IHT on 10% of the shares passed into trust. I don’t think the clause achieves what it seems to be trying to do.
I’m interested in the legal position. Presumably, if none of the estate assets are wholly qualifying for BPR, then none of the shares can be transferred to the family trust, and BPR is wasted on the first death. So far it hasn’t really mattered because the eligible value of the business gets relieved on the second death, but from April this changes and the way this Will is written risks losing the family £1 Million of BPR as current proposals say the BPR allowance will not be transferrable.
If anyone can explain what the PRs are required to do in this situation that would be really helpful.
I believe the PRs would have to follow the will as written. I agree it is poorly drafted.
If the shares qualify for BPR under s.105 then they would pass into the trust and the value of the excluded assets would be subject to IHT.
The PRs would have a choice of incurring IHT on the legacy or appointing an absolute or life interest to the spouse under the discretionary trust, taking advantage of s.144. Any IHT would be borne by the legacy so the executors would need to borrow (or raise it from the residue) and charge the shares with the debt or take an IOU of some kind from the trustees of the discretionary trust.
I doubt it is really possible to restructure after death to remove the subsidiary from the group and leave it to the spouse separately. You probably could, if all parties agreed, but I doubt it would work for IHT purposes. Maybe that is one for counsel.
If the testator is still alive then they would either have to amend their will so that it works properly, or restructure the group now, removing the excepted assets, so that the will works. Even then, if possible, you would want to reword 5.2 to remove “representing the same”.
The drafting is not just poor it is negligence awaiting fruition. The drafter either did not understand how BPR works or did so but failed to apply it to the facts which should have been a proper subject of enquiry. The drafting also apparently fails to comprehend that a company owns its own assets and a shareholder does not. An adviser’s duty is to point this out and suggest a redraft based on the law as properly explained to the client so that he is informed as to the accurate outcome of what he is signing up to and has the opportunity to give other instructions if he wishes. I understand that this kind of dilemma can be accomplished with tact e.g.if the drafting was done by someone whom the client would not wish to upset. But I would not be where I am today (literally) if tact had been an arrow in my quiver.
