Mark McLaughlin points out a possible trap and a planning point for company shareholders in relation to inheritance tax business property relief.
Many owner-managed and family companies are owned by a small number of shareholders. It will sometimes be obvious whether a single shareholder has effective control of the company by virtue of their shareholding in it. This can be important for non-tax (e.g. commercial) reasons, but sometimes for tax purposes as well.
For example, business property relief (BPR) is an important and valuable relief for inheritance tax (IHT) purposes. BPR broadly reduces the value of transfers of ‘relevant business property’ at rates of 100% or 50%, subject to certain conditions. Transfers of shares in unquoted trading companies can obtain 100% relief, regardless of the size of the donor’s shareholding (IHTA 1984, s 105(1)(bb)).
Are you in control?
By contrast, if (say) an individual shareholder owns land or buildings, machinery and plant used wholly or mainly by the company, a gift of that asset can obtain BPR at the 50% rate, but only if the shareholder then had control of the company (s 105(1)(d)); the land and buildings, etc., does not qualify for relief unless the shareholder’s shares are also relevant business property (s 105(6)).
A person has ‘control’ of a company for these purposes broadly if he has voting control on all matters affecting the company as a whole, which if exercised would yield a majority of the votes capable of being exercised on them (s 269(1)). The fact that a shareholder may own more shares in the company than anyone else does not necessarily mean that they control the company.
For example, in Walding & Ors (Walding’s Executors) v CIR [1996] STC 13, Mrs Walding held 45 out of 100 issued shares of a company on her death. She also owned factory units, which were used by the company.
The deceased’s executors claimed BPR in respect of the factory units, on the basis that 24 shares were held by her four-year-old grandson, and the voting rights attached to the grandson’s shares were not capable of being exercised by him (within s 269(1)). Consequently, it was argued that the deceased had control of the majority of shares capable of being exercised. However, the executors’ claim failed. The High Court rejected the executors’ argument that (for ‘control’ purposes) it was necessary to have regard to the personal capacity (or incapacity) of the shareholder. The factory units occupied by the company therefore did not qualify for BPR.
Casting vote?
What if a shareholder owning (say) the business premises used by the company has a 50% shareholding? On the face of it, a gift of the business premises would not qualify for BPR. However, the ‘control’ requirement may be satisfied in certain circumstances. For example, in Walker’s Executors v IRC [2001] SpC 275, an individual with a 50% shareholding and a casting vote was held to have control of the company for BPR purposes.
In addition, in determining whether a person is deemed to control a company, any shares that are ‘related property’ are taken into account (IHTA 1984, s 269(2)). ‘Related property’ includes property comprised in the estate of a spouse (or civil partner) (s 161(1)). Thus, in the above example of a 50% shareholder owning the business premises, a small number of shares held by the shareholder’s wife may be sufficient to give the husband control for these purposes, and the potential to claim BPR at 50% on a transfer of the business premises.
Practical Tip:
Watch the order of gifts. For example, a gift of shares that reduces the donor’s shareholding to less than 50% may result in the loss of BPR on a subsequent gift of the business premises, unless control is retained for BPR purposes taking into account a spouse’s (or civil partner’s) shareholding (within s 269(2)). However, even if BPR is lost due to making gifts in the ‘wrong’ order, it is not necessarily a disaster for IHT purposes if the qualifying asset was gifted to another individual, as the gift is a potentially exempt transfer that becomes exempt after seven years. Consideration could be given to taking out insurance against the risk of the transferor’s death within that period.
