Inheritance Tax – Business Property Relief

Introduction

In this case, the taxpayer made a “transfer of value” (as defined in the Inheritance Tax Acts). Prior to the transfer of value, the taxpayer executed a settlement such that the property comprised in the trust would be “relevant property”. At the time of the transfer of value by way of declaration of trust, the taxpayer did not transfer a business or a part of a business.

It should be noted that the transfer of value in issue qualified for agricultural relief but that relief was limited to the agricultural value of the land. As the land had development value, the taxpayer claimed business relief for the excess value.

The Facts

Mr Nelson Dance made a transfer of value, as defined in the Inheritance Tax Acts in late 2002 or early 2003. Immediately prior to the making of the transfer of value, Mr Dance owned and carried on the business of farming as a sole trader. The business did not consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments.

Mr Dance 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.

Prior to the transfer of value Mr Dance executed a settlement (the Nelson Dance Family Settlement) upon discretionary trusts such that the property which came to be comprised in it would be “relevant property” as defined in the Inheritance Tax Acts. On the transfer date, Mr Dance executed two declarations of trust by virtue of which part of the assets of the business became property of the settlement.

The declarations of trust gave rise to the transfer of value. The land, which was part of the assets, qualified as agricultural property. While the assets were transferred to the Trust, Mr Dance did not transfer a business or an interest in a business to the Trustees. Mr Dance died on 1 April 2004.

HMRC issued a Notice of Determination that none of the value transferred was attributable to the value of relevant business property, so that Business Property Relief was not applicable. The Trustees appealed to the Special Commissioner against that determination.

The Special Commissioner, in ruling in favour of the taxpayer, decided 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 a business rather than business assets. The Special Commissioner applied the plain meaning of the legislative provisions.

The Issue

The key issue in this decision revolved around the interpretation of the business property relief provisions:

Whether for business property relief to be available there had to be: –

• Taxpayer argument: a transfer of value which had resulted in a reduction in the value of ‘relevant business property’ in the transferor's estate, regardless of whether an actual transfer of the ‘relevant business property’ took place; or
• Revenue argument: a transfer of value that was a transfer of property that met the definition of ‘relevant business property’.

The Decision

The High Court dismissed HMRC's appeal. In order to qualify for business property relief, there was no implication in the legislation that the transfer had to be a business rather than business assets.

The Inheritance Tax Acts provides that tax is charged on the “value transferred” by a “chargeable transfer”. A chargeable transfer is defined as being “any transfer of value which is made by an individual but is not … an exempt transfer”. The transfer of value which occurred when Mr Dance created the Settlement was not an exempt transfer.

Business Property Relief provides: where the whole or part of the value transferred by a transfer of value is attributable to the value of any relevant business property, the whole or that part of the value transferred shall be treated as reduced by a specified percentage

Relevant business property is defined as:

• property consisting of a business or interest in a business;
• securities of a company which are unquoted and which (either by themselves or together with other such securities owned by the transferor and any unquoted shares so owned) gave the transferor control of the company immediately before the transfer;
• any unquoted shares in a company
• shares in or securities of a company which are quoted and which (either by themselves or together with other such shares or securities owned by the transferor) gave the transferor control of the company immediately before the transfer;
• any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by a company of which the transferor then had control or by a partnership of which he then was a partner; and
• any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by the transferor and was settled property in which he was then beneficially entitled to an interest in possession.

There are specific exclusions of property from relevant business property.

In the case where a person carried on a business, the language used in the legislation indicates that it was the business (or interest in the business) itself which was treated as the relevant business property, rather than property (such as trading stock) owned by him and used within the business. This interpretation was reinforced by further provisions, which provide that property was not relevant business property qualifying for business property relief “unless it was owned by the transferor throughout the two years immediately preceding the transfer”.

It was common ground that the declarations of trust by Mr Dance to create the Settlement amounted to a disposition involving a chargeable transfer of value. It was also common ground that the land transferred by Mr Dance into the hands of the Trustees was not itself a business. It had previously formed part of the assets of the farming business carried on by Mr Dance. The land had development value above and beyond its agricultural value.

The sole issue before the High Court was whether on the agreed facts the transfer of value arising on the disposition qualified for business property relief.

The taxpayer argued that since the land had, before the transfer, been an asset used in the farming business, legislation showed that a possible and proper characterisation was that the value transferred by the transfer of value could be regarded as attributable to the value of Mr Dance's business, which was relevant business property, so that business property relief was applicable. Whereas HMRC's argument was that on proper application of the legislation, a choice had to be made whether the value transferred by the transfer of value was attributable to the value of Mr Dance's farming business or was attributable to the value of the land.

The Judge held the taxpayer's construction to be the correct construction – the taxpayer's construction was one of simplicity and certainty whereby citizens could know clearly when tax may be charged and when business property relief was to be available; whereas the HMRC construction involved a more complex and uncertain evaluative exercise.

The judgment is available online at http://www.bailii.org/ew/cases/EWHC/Ch/2009/71.html.