SVM111230 - IHT Business Property Relief: Future use
Where an asset does not satisfy the 'purposes of the
business' test, the alternative criterion is that at the time of the transfer
it was required for future use in the business. The focus is on the existing
business and its sustenance or expansion but new ventures may be taken into
account. In all cases, however, the future use should clearly be in
contemplation at the valuation date. In other words, as regards capital
expenditure, there has to be some positive decision or firm intention existing
at that time. The mere toying with an idea or some distant thought should
circumstances change cannot suffice.
If the taxpayer claims that an asset is required for
future use, you should consider carefully
- the nature and previous history of the company's business
- the available evidence as to any prospective development or expansion.
In this context you should not take a 'snapshot' view of
the company at the valuation date.
This was emphasised by the Special Commissioners in the
case of Brown, Ralph Louis (Executors of) v IRC (1996) Sp C 0083. Although this
case was concerned with section 105(3) IHTA 1984 it is considered that the
Special Commissioners’ comments are equally relevant in the context of section 112
IHTA 1984.
Mr Brown who died in November 1986 had a 99% interest in
Gaslight Entertainments Ltd. The company carried on business as nightclub
operators. In January 1985 the company accepted an 'excellent offer' for the
nightclub it owned and operated ' with a view to finding other nightclubs' for
the company. The proceeds of the sale were placed on deposit.
The Inland Revenue claimed that after the date of sale of
the nightclub the company's business changed to that of holding investments and
thus business relief was precluded by section 105(3) IHTA 1984.
The Special Commissioner agreed that a business existed
during 1985 and 1986 but it was necessary to look at the company's operations
during the two years prior to the death. The intentions of the directors should
not be looked at in isolation to ascertain the nature of the business. That is
determined by consideration of both the company's activities andthe
intentions of the directors.
The Special Commissioner determined that from the sale of
the nightclub to the date of death the business of the company could not be
considered that of wholly or mainly of making or holding investments. The
decision was supported by the facts that although the sale proceeds were held
in an interest producing account they were available at short notice to
purchase alternative premises. Efforts had been made by the deceased to find
these premises and the Commissioner thought that were it not for the untimely
illness and death of Mr Brown such efforts would have been successful. He also
mentioned that during 1985 and 1986 the company continued to deal with
administration and marketing.
In the case of Barclays Bank Trust Co Ltd v CIR [SC
3107/97]the Special Commissioner heard an appeal by the executor bank
against a Notice of Determination by the Commissioners of Inland Revenue made
under section 221 (IHTA) 1984 in relation to the deemed transfer on the death
of the owner of 50,000 £1 ordinary shares in J A Distributors (Leigh on Sea)
Limited. The shareholdings of the deceased and her husband constituted the
issued share capital of the company and it was common ground that the shares
qualified in principle for relief from IHT.
On behalf of the Crown, it was accepted that the company
needed some £150,000 in cash at the valuation date. The point at issue was
whether, having regard to section 112 IHTA 1984, additional cash to the extent
of £300,000 owned by the company at the date of death (23 November 1990), was
an excepted asset which ranked for no relief from IHT.
It was contended on behalf of the executor bank that the
company had the intention of using its cash resources to purchase properties
owned by another company and it did in fact use over £300,000 for a venture in
1997. It was submitted that no time limit is imposed by section 112(2)(b) IHTA
1984 as, for example, there is in connection with "roll over"
provisions in other Acts.
The Special Commissioner had to determine whether the
£300,000 cash held by the company was required on 23 November 1990 for future
use for the purposes of the business. He held that this was a matter of fact
and on the evidence before him he could not find that it was so required. The
Special Commissioner went on to say "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 year’s time for the purpose 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."
Seasonal fluctuations in such assets as stock, debtors and
cash should be taken into account as appropriate.
Some companies such as travel agents and insurance brokers
hold sums of cash (sometimes quite large amounts) in a fiduciary capacity for
some months each year before passing on the cash to the respective travel
operators or insurance companies. Where the company's year-end falls within the
period when the cash is still held by the company it will not be immediately
apparent that the cash is so held. However, the amount of interest earned
should give some indication of the period over which the cash was held.
Similarly in times of recession a company may hold
significant amounts of cash and/or other investments and in a period when that
company is making losses the income stream could be considered as supporting
the company's main trading activity.
Additional Guidance: SVM150000