Most tax advisers use the guidance manuals published by HM Revenue and Customs (HMRC) on a regular basis. Taxpayers may sometimes refer to them as well. It might be tempting to go straight to the HMRC manuals for guidance on a tax issue, without looking at the relevant tax legislation. This would be a mistake and could be dangerous.
Interpreting the tax legislation in a particular way is one thing. However, beware of instances when HMRC attempts to paraphrase tax law in a manner that appears contrary to the legislation.
Business property relief
For example, HMRC’s Inheritance Tax (IHT) manual includes detailed guidance on business property relief (BPR), an important and valuable IHT relief for many business owners. In broad terms, BPR reduces the value of transfers of ‘relevant business property’ at rates of 100% or 50%, subject to certain conditions. For example, transfers of shares in unquoted trading companies can obtain 100% relief, if the relevant conditions (e.g. as to the type of business, the period of ownership, etc.) are satisfied.
However, BPR is subject to potential restrictions. For example, there is an anti-avoidance rule for ‘excepted assets’ (IHTA 1984, s 112). An asset is an excepted asset broadly if it was neither used wholly or mainly for the purposes of the business in question throughout the two years (or such shorter period as the company owned the asset) immediately preceding the transfer of value, nor required at the time of the transfer of value for future use for the purposes of the business.
If ‘caught’ by the excepted asset rule, the effect is broadly that BPR is restricted by the value attributable to the excepted asset. Only that part of a transfer of value which relates to ‘relevant business property’ is reduced by BPR; the other part relating to the excepted asset is not reduced by BPR and is chargeable to IHT as normal.
What does HMRC state?
The above definition of ‘excepted asset’ effectively has two tests; a ‘past use’ and a ‘future use’ test. If an asset is not ‘caught’ by one (or both) tests, it is not an excepted asset, and BPR is not restricted on that basis.
However, at the time of writing, HMRC guidance in its Inheritance Tax manual states (at IHTM25341):
‘In broad terms IHTA84/S112 relates only to the assets used in the business and it makes them excepted assets…(i.e. it excludes them from relief) unless
- they were used wholly or mainly for the purposes of the business throughout the whole or the last two years of the relevant period, and
- they are required for future use for those purposes.’
The key word here is ‘and’. It means that an asset would need to escape being caught by both the ‘past use’ and ‘future use’ tests to prevent being categorised as an excepted asset.
The HMRC guidance does not appear to accord with the legislation. Is it an accidental slip by HMRC, or an incorrect interpretation? Either way, the key point is to look at tax legislation and then HMRC’s guidance (if necessary), not the other way around.
The above article was first published in Tax Insider (November 2019) (www.taxinsider.co.uk).