Mark McLaughlin warns that a ‘deathbed’ inheritance tax planning arrangement can have unfortunate consequences if not handled correctly.
‘Deathbed’ inheritance tax (IHT) planning should be avoided where possible. It is often difficult, and also potentially risky because if the planning backfires it will probably be too late to do anything about it.
BPR and the two-year rule
For example, business property relief (BPR) is an important IHT relief for business owners. BPR broadly reduces the value of transfers of certain types of business property by a specified percentage (i.e., 100% or 50%), depending on the type of property.
BPR is subject to certain conditions, including that the business property is owned by the transferor throughout the two years immediately preceding the transfer.
This two-year ownership requirement is subject to limited exceptions, including for replacement property. Broadly, the ownership requirement is treated as satisfied if: the business property replaced other business property; the original and replacement property were owned for a combined period of two years out of the five years immediately preceding the transfer (e.g., death); and they were ‘relevant business property’ upon replacement and transfer.
More shares, anyone?
The ownership period of unquoted shares (which would, under capital gains tax rules for reorganisations of share capital, be identified with other shares previously owned by the transferor) is generally treated as including the ownership period of the original shares for the purposes of the two-year ownership test.
This arrangement may be useful for company shareholders, including where the BPR two-year ownership requirement is a major obstacle. However, the transactions must be implemented correctly.
For example, in Executors of Dugan-Chapman and anor v HMRC (2008) SpC 666, the deceased (MDC) was allotted one million ordinary shares in a company on 27 December 2002, just two days before her death. The question was broadly whether those shares could be identified for BPR purposes with other shares in the company which she held for at least two years before her death. HMRC argued that the shares did not result from a rights issue, but a simple share subscription. Unfortunately, there was insufficient evidence or documentation to support the executors’ contention of a rights issue. This BPR claim was therefore unsuccessful (but 300,000 shares acquired by MDC six days before her death under a rights issue following the conversion of a loan account of £300,000 that MDC held with the company qualified for BPR).
Subsequently, in Cook, The Executors of The Estate of v HMRC [2025] UKFTT 95 (TC), an individual (WC) died on 16 June 2016. HMRC determined BPR was not available in respect of 242,192 shares which formed part of a holding of 675,193 shares in a company. Prior to his death, WC also had an outstanding loan to the company of £675,000. Professional advisers recommended that the loan account be turned into additional shares by a rights issue, so that they immediately qualified for BPR in WC’s hands. The rights issue shares were allotted to WC on 10 March 2016. However, HMRC considered that BPR was not due on those shares, contending that they were not referable to shares held by WC for at least two years. Unfortunately, the deceased’s executors were late submitting an appeal, which was therefore rejected.
Practical tip
Even if the transactions are executed correctly and the BPR two-year ownership test is satisfied, the company must have a business need for the cash generated by the share issue; otherwise, the cash is likely to be an ‘excepted asset’, on which no BPR is available.
