Excepted assets (including ‘surplus cash’)
S112 prevents taxpayers from getting the benefit of business property relief for private
assets by confining the relief to assets needed for the business.
The value of any ‘excepted assets’ is ignored for the purposes of business property relief. For an asset to avoid being ‘excepted’ it must pass one of two tests which are broadly as follows:
- It must have been used wholly or mainly for the purposes of the business in question, or
- It must be required at the time of the transfer of value for future use for the purposes of the business in question.
An asset used wholly or mainly for the personal benefit of the transferor (or of a connected person) would not be an asset “used wholly or mainly for the purposes of the business”.
The ‘future use’ test was considered in Barclays Bank Trust Co Ltd v CIR SpC 158.
A lady died holding half the shares in a company. Her husband held the other half. The
company’s trade was the sale of bathroom and kitchen fittings, mainly to ‘trade’ customers.
The company‘s turnover at the time of the lady‘s death was approximately £600,000. It held £450,000 in ‘cash’ invested for periods of up to 30 days. HMRC accepted that the company needed £150,000 but determined that £300,000 was an ‘excepted’ asset.
The Special Commissioner posed the question as follows, at para. 10 of his decision:
“Was the £300,000 cash held by the company required on 23 November 1990 for future use for the purposes of the business? This is a question of fact and on the evidence before me I cannot find that it was so required. I do not accept that ‘future’ means at any time in the future nor that ‘was required’ includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven years’ time for the purposes of the business. In my opinion and I so hold that ‘required’ implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose.”
Two points are relevant:
- Only the value of excepted assets is left out – the remaining value (assets) get business property relief (assuming the conditions are satisfied)
- Cash can be as much an ‘excepted asset’ as, for example, an insurance bond. In other words, switching from cash to a bond (or vice versa) should have no effect on availability of business property relief.
In January 2014, the Institute of Charted Accountants in England & Wales (ICAEW) issued a Technical Release containing guidance agreed with HMRC regarding surplus cash.
The ICAEW reflected that many businesses within the UK are retaining increased cash buffers in case of any further downturn in trade, and accordingly confirmation was sought from HMRC if it would look favourably on surplus cash held in this regard. The response of HMRC was as follows:
“We understand that due to the financial circumstances in which business find themselves, they may choose to hold more cash in case of a potential downturn in trade. We can also confirm that in recent times we have seen this on a more frequent basis where businesses hold cash in excess of what they would traditionally require.
However, our guidance remains the same, and unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset. Therefore the holding of funds as an ‘excess buffer’ to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset.”
The rule excluding excepted assets is relaxed in the case of land or a building where only part is used exclusively for the purposes of the business. In these circumstances an apportionment takes place between the two parts (S112(4)). For example, apportionment would take place where the deceased owned a three-storey building but only used the ground floor as a shop. Where a mortgage is secured on the property, then unless it is secured on a particular part of the building it should be apportioned rateably between the relevant parts.
Gifts with reservation
Property falling under the gifts with reservation (GWR) rules has to satisfy two conditions to qualify for business property relief:
- At the time of the gift the property given has to be relevant business property, and
- At the time of the GWR charge (on the death of the donor or earlier release of the reservation) the property would qualify for business property relief if the donee then made a notional transfer of value of it.
Interaction with agricultural property relief
Agricultural property relief (APR) is given in priority to business property relief, and therefore it is not possible to claim business property relief on a business asset if the asset also qualifies for APR.
Business protection – binding contracts for sale
It is common for partners and shareholders (in private companies) to enter into reciprocal agreements so that when one person dies, the surviving business ‘associates’ may purchase the deceased’s business interest funded by the proceeds from life assurance policies. If there is a binding agreement that the personal representatives are required to sell the business interest and the survivors are obliged to purchase, then no business property relief will be available. The overarching reason relief is denied is that effectively the deceased has simply bequeathed cash rather than a business interest.
This problem is easily overcome with a double option agreement where the personal representatives have the option to require the survivors to purchase the business interest and correspondingly, the survivors have the option to require the personal representatives to sell. Accordingly, at point of death there is no binding agreement in place and business property relief is not denied.
Liabilities to acquire business property
It’s no longer possible to reduce the value of an estate for IHT purposes by securing a loan on it where the loan is then used to acquire property qualifying for business property relief (S162B(1)).
Where money is borrowed to acquire assets qualifying for business property relief, then the liability firstly reduces the value of the assets that qualify for relief. This is the case even if the liability is actually secured against other assets in view. Business property relief is then given against the net value of the asset after deduction of the liability. Any remaining value of the liability may then be set against any other assets that are chargeable to tax, as long as the deduction is allowed (S175A).
Gordon borrows £450,000 secured against his house and uses these funds to acquire AIM
shares. When he dies five years later, the shares are worth £575,000 and qualify for business property relief. The rest of his estate is worth £1.5m. At the date of death the liability is taken to reduce the value of the AIM shares that can qualify for business property relief from £575,000 to £125,000. Business property relief applies to that value.
The total estate, including the AIM shares is £2,075,000 (£1.5m plus £575,000).
This is reduced by business property relief of £125,000 and the liability of £450,000. The value of the chargeable estate is £1.5m.
Business property relief planning ideas
Planning with business property relief is a specialist area. However, below is a brief overview of the simpler planning aspects.
Passing on business property
Consider an individual who owns shares in a private trading company qualifying for business property relief. If the individual dies, then there will be no IHT on those shares and there will be an uplift in the capital gains tax (CGT) base cost to market value at death. Therefore assuming no changes in legislation, the business property can be passed on free of tax. Consideration may be given to leaving this property to a discretionary will trust to crystallise the business property relief rather than to an exempt spouse or civil partner. The business property should be the subject of a specific gift otherwise the relief will be apportioned over the whole estate including the spouse / civil partner exempt portion.
There may of course be non-tax reasons why it may not be desirable for business owners to retain the business property until time of death.
Transferring business property into trust
An individual with shares in a private trading company qualifying for business property relief could transfer those shares into a discretionary trust with no initial IHT charge. That might be done in anticipation of a sale of the shares with the proceeds then subject to the relevant property regime rather than being inside an individual’s estate for IHT purposes. CGT implications would need to be considered. In addition, individuals would need to be mindful of the potential impact of the settlor interested trust provisions (income tax) and gift with reservation rules (IHT).
Individual savings accounts (ISAs)
Alternative Investment Market (AIM) shares can now potentially qualify for the stocks and shares ISA, meaning IHT business property relief (BPR) may be available on death of the investor.
IHT simplification
On 23 November 2018, the Office of Tax Simplification published its First Report regarding its review of the IHT regime. This concluded that too many people have to fill in IHT forms, with the process being complex and old fashioned. The recommendations therefore relate to administrative issues. The second report covering wider areas of concern (technical and design issues) was published in July 2019. This included a recommendation that the ‘seven year clock’ should become a five year clock. Also, there was a recommendation that the Government should consider whether it is appropriate that the level of trading activity for BPR is currently set at a lower rate than that for CGT holdover or Entrepreneurs’ Relief. Also, should the IHT treatment of furnished holiday lets be aligned with that of income tax and CGT. There was also a recommendation that where a relief or exemption from IHT applies (e.g. relief for Business Property) the Government should consider removing the CGT uplift and instead treat the recipient as acquiring the asset at the historic based cost of the deceased.
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