A special commissioner decided that the business carried on by a company at the date of the death of a shareholder did not consist wholly or mainly of making or holding investments so that the holding qualified as relevant business property for the purposes of inheritance tax relief.

Facts

On her death, a taxpayer held shares in a company which, since 1989, had not purchased or held any investment property but had only made loans. Shortly after 1989 two loans were made to individuals but otherwise all the loans made since that date were made to related companies. Its accounts showed that, in years after 1989, its only assets were cash at the bank and amounts owed to it, mainly by its related companies. The loans were made to finance the purchase by the related companies of property to be held as investments. The loans were repayable at will and were very informal in character. The criteria for the making of each loan were whether the borrowing company could afford to make the interest payments and whether the value of the property to be purchased by the borrowing company was commensurate with the amount of the loan. Decisions about the making of loans were made by the directors and with each loan the company did not acquire any formal legal charge over any property purchased by the borrowing company, nor did it take a floating charge over the property of the borrowing company. No other form of security or guarantee was provided and the company never owned any shares in the borrowing companies.

The company always charged the borrowing companies interest at 2.5 per cent above base rate. Monthly interest statements were usually prepared but the company did not have any employees. There was one single head office for all the related companies, all the files were kept there; all correspondence took place from there; and all banking and treasury functions were operated from there.

In 1999 there was correspondence between the Revenue and the company's auditors about whether the company qualified for the small companies’ rate of corporation tax. On 6 December 2000 the Revenue accepted that the company's activities had changed and the company should no longer be treated as a close investment holding company. The company was therefore treated, for corporation tax purposes, as a trading company from the tax year ending on 5 April 1998.

The executors of the deceased taxpayer appealed against a notice of determination under s. 221 of the Inheritance Tax Act 1984 (‘IHTA 1984’) in relation to the deemed disposal of certain shares on the death of the taxpayer. The Revenue considered that the taxpayer's holding of 245,000 £1 ordinary shares in the company was not relevant business property for the purposes of claiming business property relief under IHTA 1984, s. 104, having regard to the requirements of s. 105(3) which provided that shares in a company were not relevant business property if the business carried on by the company consisted wholly or mainly of making or holding investments.

Issue

Whether the business carried on by the company at the date of the death of the deceased taxpayer consisted wholly or mainly of making or holding investments.

Decision

The special commissioner (Dr AN Brice) (allowing the appeal) said that no previous decision had addressed the issue of whether the making of loans was the making or holding of investments. The company in making loans to related companies could be said to be laying out money in anticipation of a profitable income return which could point to the conclusion that it was making or holding investments. However it could not be said that the making of loans was always the making of an investment or that it never was. Many would regard the purchase of a bond or debenture as an investment when in fact it was the making of a securitised loan but on the other hand few would regard the activities of a moneylender as investment. At one end of the spectrum lending could be investment in bonds or debentures but at the other end of the spectrum could be the making of informal unsecured loans which activity amounted to no more than moneylending.

Thus in determining what was the business of the company it was necessary to have regard to all the facts in the round. On its ordinary meaning, the business of the company did not fall within the definition of the making or holding of investments. The company did not make or hold investments; it made informal loans to its related companies and moneylending was not normally regarded as investment.

The main object of the company, as set out in its memorandum of association, was to acquire land and buildings for the purposes of investment only but the fact was that, since 1989, that was not what the company had done. What it had done was to concentrate on another object which was to lend money to its related companies. That was the actual activity of the company at the relevant date for the purposes of the appeal. Also, at the relevant date, the company's main purpose was to support the related family companies by providing them with unsecured finance without fees or delays. All the loans were repayable on demand with no security and that also indicated that the loans were not in the nature of investments.

The company was in the business of making loans and not in the business of investing in loans. The loans were not assets acquired or held by the company for the purpose of making profits for division among the shareholders but were rather made for the purpose of providing a benefit to the other companies. The loans were not investments for their own sake but the provision of a finance facility to the other companies. The company did not acquire any interest in the shares of the borrowing companies nor in the properties acquired by the borrowing companies. Neither did it acquire any rights in the increases in value of the properties purchased by the borrowing companies. All it was entitled to was the interest payable to it by the borrowing companies. The evidence about the loans to the two individuals was that those two loans were made early in or shortly after 1989 and they were both written off.

In reaching that decision, the commissioner had not been influenced by the description of the activities of the company in the directors’ reports but rather had had regard to the facts found on the evidence. Neither had the commissioner been influenced by the treatment of the company for the purposes of corporation tax, bearing in mind the views of Carnwath LJ in IR Commrs v George & Anor (exors of Stedman, dec'd) [2004] BTC 8,003, that cases relating to different taxes and different subject matter were unlikely to be helpful. Neither were comparisons with banks helpful. Although the company here made loans, it could not be said to act in that respect like a bank because it did not take security for the repayment of the loans and it did not act in other respects like a bank. Finally, the fact that, if the company were investing in loans it would have been better to invest directly in property where the return was much greater, did not assist in determining whether the company's business consisted wholly or mainly of making or holding investments.

(2006) Sp C 555. Decision released 26 July 2006.