A special commissioner decided that business property relief was not available in respect of shares allotted to the deceased two days before her death which could not be identified with any of the deceased's pre-existing shares for the purposes of the IHTA 1984, s. 107(4).

Facts

The deceased was allotted 1 million shares in a company (W Ltd) two days before her death. When she died, there was a charge to inheritance tax (IHT) as if she had, immediately before her death, made a transfer of value. The value transferred was equal to the value of her estate at that time which included shares in W. If those shares (or any of them) were ‘relevant business property’ then the value transferred as a result of her death would be reduced, as would the IHT payable. The reduction in the value transferred was business property relief (BPR). The conditions for the relief were contained in IHTA 1984, Pt. V, Ch. 1.

Section 107(4) of IHTA 1984 made reference to s. 105(1)(bb); s. 105(1)(a) to (e) inclusive, contained the meaning of ‘relevant business property’ and (bb) provided that any unquoted shares in a company were amongst the assets that could be considered as relevant business property because the whole of s. 105(1) was subject to the conditions contained in the rest of s. 105, in s. 106 (the two-year ownership requirement) and s. 108, 112(3) and 113. By virtue of IHTA 1984, s. 107(4), the shares in question would only satisfy the two-year ownership requirement and qualify for BPR for IHT purposes if they could be identified with shares already owned by the deceased for at least two years before she died.

The Revenue contended that there was a simple subscription by the deceased which was not a reorganisation and that the principle established in Re Duomatic Ltd [1969] 2 Ch 365 (that where all shareholders of a company who were entitled to vote on a matter actually agreed to a particular decision, the decision was binding and effective without a meeting) could not apply to re-write a transaction that did not occur. The executors argued that it had been intended that the whole or part of the shares should be treated as allotted to the deceased in the course of a reorganisation and should be identified with her pre existing holding so that some part of the new shares qualified for relief.

Issue

Whether the whole or part of the relevant shares resulted from a reorganisation of W Ltd's share capital so that those shares could be identified with shares owned by the deceased before the acquisition.

Decision

The special commissioner (JM Powell) (dismissing the appeal) said that s. 107(4) allowed property to be treated as satisfying the two-year ownership condition if it could be identified with property that satisfied the condition under any of the provisions of TCGA 1992, s. 126–136.

The phrase ‘reorganisation of a company's share capital’ was not a term of art but derived colour from its context. An increase of share capital could be a reorganisation of that capital, notwithstanding that it did not come within the precise wording of s. 126(2)(a) provided that the new shares were acquired by existing shareholders and in proportion to their existing beneficial holdings. It was not obvious from the documentation signed in connection with the acquisition in issue that there was a rights issue or any acquisition by the deceased as existing shareholder in proportion to her existing holding (Dunstan v Young Austen & Young Ltd [1989] BTC 77 considered).

The executors had argued that there was a reorganisation. They accepted that there would not have been a reorganisation if the deceased had simply subscribed for shares. They put forward two possible positions. First, there was a larger reorganisation, involving 2,261,794 shares, in which the deceased alone effectively participated and to the limited extent of 1 million shares which represented that number of the total of 2,261,794 that were proportionate to her original holding. If that was the case, then 1 million shares attracted BPR. Alternatively, there was a rights issue totalling 1 million shares all of which were taken up by the deceased, but she acquired a substantial portion of the shares by reference to existing holdings.

The special commissioner had no hesitation in rejecting the first possibility. There was no evidence of any larger reorganisation of which the issue of 1 million shares to the deceased was a part. As to the second possibility, there was confusion about the effect of the rights issue throughout the process.

Although those involved hoped that the rights issue and the allotment would have inheritance tax advantages, it was not clear that they were clear about the exact nature of the advantages and the effect of the rights issue. Moreover, the allotments were thought commercially desirable and also supported the IHT position by showing that W Ltd was conducting business. That had nothing to do with securing BPR for new shares. Finally, it could not be said that the members understood the relevant facts so as to permit application of the Duomatic principle.

(2008) Sp C 666.
Decision released 7 February 2008.