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Effect of excepted assets in a subsidiary on BPR

Do excepted assets in a subsidiary operate to limit BPR on the holding company's shares?

Didn't find your answer?

I'm just trying to get my head a potential issue with a soft loan asset in a trading company, and in particular how it impacts on BPR for the parent if at all. I think there is a real prospect of HMRC concluding it is not for business purposes (no interest charged and to a family member). The trading subsidiary is clearly trading, so it doesn't seem to be an issue with Section 111 IHTA 1984 and the holding company will qualify for BPR under Section 105(4)b). However, down the group structure is the non-trading asset - how, if at all, does it operate to restrict the available BPR under Section 112? Is part of the holding company's value attributed to it and excepted from IHT? I've tried the HMRC IHT Manual but could not see an obvious answer. 

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By The Dullard
11th Jun 2021 17:17

I think that the effect of the postamble to s 112(2), taken together with, and in the context of, s 105(4)(b), is that you are, in effect, treating the business of the entire group (excluding any companies already excluded by s 111) as all being carried on by the holding company.

That is the assets of the subsidiary (incuding the loan) are assets of the holding company's business of making or holding investments in trading companies.

That's how I read it.

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By Tax Dragon
11th Jun 2021 18:11

It's a shame you chose to ask anonymously. It's a great question and this legislation contains a degree of murk - at least, to me it does. Whether The Dullard is correct or not I cannot demonstrate, but HMRC takes a very similar view. It is on record with statements such as:

"Our approach is to look at the group as a whole to determine whether it is mainly investment or non-investment in nature. If the conclusion is that the business of the group as a whole does not consist wholly or mainly of making or holding investments (or other activities within IHTA84/S105(3)), we then go on to consider individually all the subsidiaries within the group structure to determine whether any restriction of the relief is necessary in accordance with IHTA84/S111."

Mention of "the business of the group as a whole" supports The Dullard. I don't think it's quite correct to say that you treat that business as carried on by the holding company (in fact, I think that's dangerously incorrect) - but for the purpose of your precise question, it's good enough.

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By The Dullard
11th Jun 2021 23:54

Go back and read the postamble in s 112(2) in the context of the way in which s 105 is written.

S 105 says that business property includes shares. Then it says that business cannot include the making or holding of investments (implying that the making and holding of investments is a business, as we've discussed before). Then s 105(4) essentially says but that doesn't apply to holding companies of trading groups.

We exclude any non-trading companies by virtue of s 111, and then in s 112 we think about "the business concerned", which from s 105 is the business of the company we've got shares in; the making and holding of investments in non-investment companies. And s 112(2) concludes by saying that the assets of other members of the group are treated as being assets of "the business concerned". Those assets may then include excepted assets.

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By Tax Dragon
12th Jun 2021 08:02

That's fine if HoldCo does nothing but hold shares. That's the only business you're then initially concerned with and you can open the group up and look at the overall position, firstly to see whether overall it's wholly or mainly trading and secondly in the application of s112*. (And there's a s111 point as well, which you describe.)

My hardness of understanding (as I suspect you would put it) comes about when HoldCo does other stuff. Because then its business is probably not wholly or mainly that of being a holding company. (The courts have decided you have to consider more than just value, for example.)

If so, s105(4) doesn't apply and your context for reading s112(2) is ripped from under you.

And without that context, I get lost in the murk.

*Autocorrect changes this to s222... maybe I have been part of too many OMR discussions in here!

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By Tax Dragon
12th Jun 2021 08:11

Also, if HoldCo's other activities are things like letting property - an investment business - then I think you might have problems getting BPR at all. (Whereas of course if you can pretend the group is effectively one company - or as you put it that all the activities of the group are carried on by HoldCo - the issue I describe doesn't arise.)

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By oxfordheadington
11th Jun 2021 19:27

Thank you both - that is very useful. I think i was concerned that my substance over form approach (looking at group as a whole) didn't fit comfortably with the wording of the section but those comments support my original gut feeling.

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By Tax Dragon
14th Jun 2021 06:49

@Anybody who's interested, normally when someone in here falls silent halfway through a discussion, I interpret it as "you're right, I've been talking out the back end of a horse" or similar. (This site would produce beautiful roses, if it could be harnessed thus.)

@Dulls, you are the only contributor whose halfway silences I (sometimes) interpret as "go away and read again, [Dragon/other halfwit]".

There's a secondary meaning I impute to some of your silences... something like "but don't think too hard about it/don't go getting funny notions/don't rock the boat baby".

This is one such silence. And I've done as you silently suggested. I've read the legislation. I've read the HMRC interpretation in SVM (it's more detailed than IHTM, which I quoted above). And I've stopped thinking about it.

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By The Dullard
14th Jun 2021 09:35

It's more complicated than you imagine. So, I couldn't be arsed to think about it anymore.

The "holding company" might not be "THE" holding company at all. The individual could have shares in an intermediate holding company part way down the group. There are no end of parameters.

I agree with you that, the company in which the shares are held must first meet the wholly or mainly test, but I think in applying that test it would be necessary to consider both the activities of the company itself, and the group below. Otherwise you might get a nonsense result.

After applying that test, you need to apply s 111 to exclude any companies that don't meet its test from the valuation of the company in which the shares are held.

I agree with you that it is about valuation of the shares, but s 112 then requires the valuation to be reduced by any excepted assets, it achieves that through a fiction of pretending that all of the assets of the group (above and below, it seems to me) are assets of the business concerned. The fiction doesn't matter for the non-excepted assets, but the valuation is reduced by the group's excepted assets, by my reading.

I find myself in frequent disagreement with SVM too. Most notably it suggests that the effect of s 166 (which requires a debt receivable to be valued on the assumption that it will be paid, unless there is clear evidence to the contrary) is that the value of the debt is simply the amount outstanding.

In valuing such a debt, and making the assumption that it will be paid, the first question one asks oneself is "WHEN will it be repaid?".

Which is worth more? £100 in cash? or a £100 promissory note that you have to negotiate or redeem in order to have £100 in cash?

If the promissory note cannot be redeemed for 50 years (but it will definitely be redeemed, as the creditor's standing is good), how much is it worth today?

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By Tax Dragon
14th Jun 2021 10:03

I asked Judge Thomas about his comment "Otherwise there would be double tax" (my paraphrase/bad memory) the other day. Turns out there's some judge-made law and "otherwise there would be double tax" is a real thing. Very instructive.

Now you've said something of equal import:

The Dullard wrote:

Otherwise you might get a nonsense result.

The meaning of this phrase is, I think, far less clear than "double tax". (Tax law is hardly logical, so finding nonsense in it is hardly surprising. I for one think it's nonsense that a mixed trading and investment company qualifies for BPR, or doesn't qualify for BPR, depending which way round the 51/49 split is. But that it does is what the law says.)

So, when it comes to arguing a particular case, I will use SVM and your position (and I will almost certainly get BPR). But when it comes to planning and advising, I'd rather not leave it to chance. Because I don't believe "otherwise you might get a nonsense result" is a real thing. (Although I do remember two former Aweb greats, PNL and Ruddles, tossing "nonsense" arguments at each other on a regular basis, so maybe this is yet another judge-made rule of which I am ignorant?)

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By The Dullard
14th Jun 2021 11:03

I own all the shares in a company, X. X has two investments in shares, each being £100, being the entire share capital of two trading companies, each with a turnover of £5 million, but hitherto fairly minimal profits, due to investment in research and development activity. What profits there have been have been retained, and so no dividends have been paid to X.

X also owns a rental property in Londinium, worth £1 million, which has an annual net rental income of around £100K.

Do the shares qualify for BPR?

That rests on how you answer the question posed by s 105(4)(b). Is it's business mainly being a holding company of the two trading companies? If not, no BPR.

If we just base it on X's balance sheet, without revaluing the two investments in shares, and X's P&L account, there's no BPR.

My "nonsense result" point is that that doesn't "feel right" to me, but the best case law we have is about a farm and how much of it was used passively and how much of it was used productively. As you note, here SVM agrees with me, but there's no apparent reason in law for that agreement, it probably just doesn't "feel right" not to.

We not that for the equivalent CGT (20%+) test we do look at the group as a whole, because there the legislation tells us to. What goes on in the group below is certainly a better indicator of how much management effort is going into the different businesses/part of the business.

Now, we could tell the client to move the property down into a subsidiary, because then we perhaps sit in a more comfortable position with s 105(4). The trouble is that now the value of the property subsidiary will definitely be excluded by s 111, when it quite probably wasn't before.

There's a phrase that counsel use a lot when providing advice. It's, "... in my/our opinion...". It means, "I haven't actually got a hook to hang it on, but I think it's the right answer". It's useful in planning and advising.

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By The Dullard
14th Jun 2021 11:15

Another reason people go quiet is because their post has been caught by the completely fuching useless spam filter; that doesn't stop any spam and just catches posts that aren't.

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By Tax Dragon
14th Jun 2021 11:31

Noted.

FWIW I think you are suggesting reading the legislation purposively and that some conclusions which seem at odds with the purpose ought to be ignored.

Were I to take such an approach (without pre-agreement from the courts) I think I would want a second opinion - from Counsel if the numbers warranted it - who on this occasion would probably tell me what you're telling me, but at least I'd've passed on the responsibility for the caveats (to someone who charged 20 times more for writing them!)

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