Business property relief (BPR) is a potentially generous form of inheritance tax (IHT) relief, which can reduce transfers of ‘relevant business property’ (e.g. shares in an unquoted company) during lifetime or upon death at rates of up to 100% (or alternatively 50%), if certain conditions are satisfied (IHTA 1984, ss 103-114).
However, BPR will generally be denied if there is a ‘binding contract for sale’ of the business property at the time of its transfer (IHTA 1984, s 113). This is an anti-avoidance provision. The underlying principle of BPR is that relief should be available in respect of relevant business property, but not cash.
For example, if a chargeable lifetime gift of unquoted shares (on which BPR is claimed) was followed shortly afterwards by a sale of the company, it might be argued that the gift was effectively a transfer of part of the company’s sale price. HM Revenue and Customs (HMRC) may seek to apply the anti-avoidance rule in such circumstances (see below).
There are two specific exceptions to the anti-avoidance rule on contracts for sale. The first exception can apply to some business incorporations, i.e. if the binding contract is for the sale of a business (or business interest) to a company which is to carry on that business, where the consideration is wholly or mainly the company’s shares or securities. It should be noted that an incorporation in the form of a business sale wholly or mainly for cash is not within this exception.
The second exception relates to company shares or securities, where the sale is made for the purpose of reconstruction or amalgamation (IHTA 1984, s 113(a), (b)).
Lifetime transfers shortly before sale
HMRC is alert to BPR planning such as chargeable gifts of business property made shortly before its sale to a third party (See HMRC’s Inheritance Tax manual at IHTM25291).
In the above example of a chargeable lifetime gift of unquoted shares followed by a sale of the company, the BPR position might be “carefully checked” by HMRC to see if there was a binding contract for sale at the date of transfer. If there was a binding contract, BPR will generally be denied. HMRC guidance (in its Shares and Assets Valuation manual at SVM111120) suggests that the following cases will be subject to close scrutiny:
- Lifetime transfers where a sale of the company (or of part of the share capital including the transferred shares) occurred within six months following the transfer; and
- Any other such case where a sale occurred outside the six months period, but the circumstances suggest that the sale may have been in prospect at the time of the lifetime transfer.
In those circumstances, HMRC is likely to request any paperwork relating to the original transfer of the shares, together with the subsequent sale of the company, to determine whether a binding contract for sale existed at the time of the original transfer.
The binding contract for sale provisions were not in point in Swain Mason and others v Mills & Reeve (A Firm)  EWCA Civ 498 as the share disposal in question had already taken place, but the case highlights the importance of considering the timing of business sales for BPR purposes in the particular circumstances. In that case, the claimants were executors of their late father’s estate. The deceased (CS) was the managing director and majority shareholder of a company, which was the subject of a management buyout (MBO) completed on 31 January 2007. CS had a history of ill-health, and he sadly died in February 2007 shortly after being admitted to hospital for a heart procedure.
The proceeds from the sale of the deceased’s shares became liable to IHT, whereas if CS had died while still owning the shares, no IHT liability would have arisen due to BPR. A claim of professional negligence was made against the defendant firm on the basis that, if due advice had been given, completion of the MBO would have been deferred until after the heart procedure. However, the court held (among other things) that the defendant firm had not been asked for advice on the potential tax consequences of CS’s death in the light of his forthcoming heart procedure. The claim was dismissed.
HMRC accepts that, in certain specific circumstances (which are not considered in this article), particular types of agreement (e.g. options to purchase) may not constitute binding contracts for sale so as to prevent relevant business property from qualifying for BPR under the anti-avoidance provisions in s 113 (see HMRC’s Shares and Assets Valuation manual at SVM111120). However, care is needed, and expert professional advice should be sought if necessary.
The above article was first published in Business Tax Insider (May 2017) (www.taxinsider.co.uk).