SVM111090 - IHT Business Property Relief: Practical considerations, including restriction of relief under section 107(2) IHTA 1984
Practical considerations
The ownership tests have to be satisfied in respect of the particular shares transferred. Where the transferor acquired additional shares during the 2 years prior to the transfer and it is claimed that the shares transferred derived from the holding acquired earlier, this should be evidenced such as by a copy of the relevant entries in the register of transfers or of the relevant share certificates. However, if firm evidence does not exist (for example because, following a reorganisation of the share capital, a fresh certificate was issued to cover the whole of the transferor’s holding) relief may be given to the extent that it would be available on the basis of a ‘first in - first out’ assumption.
For the purposes of the two-year ownership test property acquired on an earlier death is deemed to have been owned from the date of death, or, if the earlier death was that of a spouse/civil partner, from the date that spouse/civil partner acquired the property (section 108 IHTA 1984). There is however no provision corresponding to the latter for lifetime transfers between spouses/civil partners. In that case the ownership period of the transferee spouse/civil partner runs only from the time of the transfer to them.
A bonus or rights issue should not normally be regarded as a newly acquired holding for the purpose of the ownership tests. Provided the bonus or rights shares were issued in proportion to all the shares of a company, or to all the shares of a particular share class, the allotment to the transferor will come within section 107(4) IHTA 1984. Careful consideration should always be taken with rights issues,
Replacement provisions - section 107(2) IHTA 1984
Under section 107(2) IHTA 1984 where the ownership test is satisfied by virtue of section 107(1) IHTA 1984 relief is restricted to what it would have been had the replacement, or any earlier replacement to be taken into account, not been made. This restriction applies to all replacements, except a replacement involving the company’s take-over of a former unincorporated business of the controlling shareholder. See IHTM25313.
Section 107(2) IHTA 1984 is an anti-avoidance provision, and its purpose is to prevent a person who has qualified for relief from purchasing a much more expensive property shortly before death or making a transfer.
The application of Section 107(2) IHT 1984 should be practical. A reasonable approach aimed at quantifying and agreeing the restricted relief should be adopted unless there is evidence that the deceased/transferor’s resources were being rearranged into considerably more extensive property aimed at increased relief.
An example of the approach to adopt can be found at SVM112090 which deals with the equivalent provisions for replacement property for Agricultural Relief.
It may be noted that these replacement provisions relate to any replaced property which constituted ‘relevant business property’ within section 105(1) IHTA 1984 and not just to shares and securities.
Additional Guidance: SVM150000