A special commissioner decided that, for purposes of claiming business property relief pursuant to IHTA 1984, s. 104, all that was required was that the value transferred by the transfer of value was attributable to the net value of the business. There was no implication that the transfer had to be of a business rather than merely business assets.

Facts

The settlor made a transfer of value, as defined in IHTA 1984, s. 3 (‘the transfer of value’) in late 2002 or early 2003. Immediately prior to the making of the transfer of value, the settlor owned and carried on the business of farming as a sole trader (‘the business’).

The business did not consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments. The settlor owned the business throughout the two years immediately preceding the transfer of value. The business was not subject to a binding contract for its sale at the time of the transfer of value. The assets used in the business included land and buildings, namely some 1,735 acres of agricultural land plus two cottages.

Prior to the transfer of value the settlor executed a settlement upon discretionary trusts such that the property which came to be comprised in it would be ‘relevant property’ as defined in IHTA 1984. s. 58. On the transfer date, the settlor executed two declarations of trust by virtue of which approximately 141 acres and the two cottages and a further 218 acres, became held upon the trusts of the settlement. The declarations of trust gave rise to the transfer of value.

The land qualified as agricultural property for the purposes of IHTA 1984, s. 116 and was occupied by the settlor for the purposes of agriculture throughout the period of two years ending with the date of the transfer of value, and was not subject to a binding contract for sale at the time of the transfer of value.

Upon the transfer of value the settlor did not transfer a business or an interest in a business to the trustees. The settlor died on 1 April 2004 and the trustees appealed against a notice of determination that, in relation to the transfer of land to the trustees of the family settlement, having regard to the provisions of IHTA 1984, s. 105, none of the value transferred was attributable to the value of relevant business property. A preliminary issue arose as to what constituted ‘relevant business property’.

The trustees contended essentially that the estate included relevant business property (‘the business’), that by reason of the transfer of value the whole of the value transferred (the amount by which the value of his estate was less than it would be but for the disposition (s. 3(1)) was attributable to the value of the relevant business property (being the net value of the business (s. 110)). Accordingly the whole of the value transferred was treated as reduced in the case of property consisting of a business or an interest in a business (s. 105(1)(a)) by 100 per cent. The policy of the relief was not to encourage transfers of businesses but to encourage the carrying on of business, and so there was no policy reason to restrict the relief to gifts of businesses. The relief operated on death even if the business were then to cease.

The Revenue contended essentially that the reference to the value of the relevant business property (not the whole or part of the value transferred, as referred to twice in the opening words of s. 104), implied that the transfer must be of a business (including a part of a business capable of being a separate business), but not merely business assets. The reference in s. 104 to value transferred did not mean an amount as it did in s. 3, but the nature of the property. The policy of the relief was both to encourage business and the transfer of business, and so the policy required restricting the relief to transfers of businesses.

Issue

Whether for business property relief to be available under IHTA 1984, s. 104, there had to be a transfer of value which had resulted in a reduction in the value of ‘relevant business property’ (as defined by IHTA 1984, s. 105) in the transferor's estate, regardless of whether an actual transfer of the ‘relevant business property’ took place; or a transfer of value that was a transfer of property that met the definition of ‘relevant business property’ in s. 105.

Decision

The special commissioner (Dr John Avery Jones) (allowing the appeal) said that the issue arose because, although the transfer of value in issue qualified for agricultural relief, that relief was limited to the agricultural value of the land. Here the land had development value and so the trustees claimed business relief for the excess value.

The structure of inheritance tax was important to understanding whether value transferred could mean something different in s. 104 from s. 3. The starting point was a disposition that reduced the value of a person's estate under s. 3. In addition to actual transfers of value resulting from a disposition there were deemed transfers of value, such as the transfer on death in s. 4. Some transfers of value were exempt, such as transfers between spouses (s. 18), annual exemption (s. 19), small gifts (s. 20), normal expenditure out of income (s. 21), gifts in consideration of marriage (s. 22), gifts to charities (s. 23), gifts to political parties (s. 24), gifts to housing associations (s. 24A), gifts for national purposes, etc. (s. 25), maintenance funds for historic buildings (s. 27), and employee trusts (s. 28).

A transfer of value was an exempt transfer to the extent that the value transferred was attributable to property which became comprised in the estate of the transferor's spouse (s. 18(1)). Transfers of value that were not exempt were chargeable transfers on which the tax was charged. The reliefs for business property and agricultural property (s. 116) operated by reducing the value of the value transferred. Everything turned on the loss in value to the donor's estate, rather than what was given or how the loss to the estate arose, except where the identity of the recipient was crucial to a particular exemption. It was unthinkable that value transferred could mean different things in s. 3 and s. 104.

In the case of business relief, the value transferred had to be attributable to the value of assets; in the spouse exemption, the value transferred had to be attributable to property (rather than the value of the property) which became comprised in the spouse's estate. The former required attribution of the value transferred to a value, and the latter to particular property. Business relief was therefore much more concerned with values than property. Although the attribution was to the net value of the business as a whole, this did not imply that the value transferred must relate to the whole business. Indeed the exclusion for value attributed to excepted assets in s. 112 showed that the value transferred might need to be attributed to the value of particular business assets (although that would equally be the case if the relief were restricted to transfers of the whole business). Presumably the attribution to the net value of the business was to put a ceiling on the relief to prevent a transferor giving away the total assets of the business, claiming business relief for them, while retaining the liabilities and paying them out of other assets (although that seemed to be possible for agricultural relief as the relief was given in terms of attribution to the agricultural value of agricultural property).

There was no ambiguity, as understood in Finch v IR Commrs [1984] BTC 8,046, in s. 104, and nothing had been argued that they did anything to require the tribunal not to give effect to the plain meaning of s. 104. Accordingly, it was not necessary that the whole business should be transferred for the relief to apply.

Applying that interpretation of s. 104 to the facts, all that was required was that the value transferred by the transfer of value was attributable to the net value of the business. Clearly the assets comprised in the declarations of trust were attributable to the net value of the business as they were a component part of the assets used in the business contributing to that net value. Business relief therefore applied to reduce the value transferred by 100 per cent. Accordingly the determination would be quashed.

(2008) Sp C 682.

Decision released 8 May 2008.