Assets excluded from relief: Assets not used in the business
When you investigate whether there are any assets excluded from relief (IHTM25341) because they were not used in the business, you should examine the accounts and information supplied by the taxpayer to establish whether the assets shown were in fact used in the business at the time of the death/transfer.
An asset described as a business asset or included in business accounts will not necessarily be used in the business. This applies particularly to cash, bank accounts, building society accounts and similar assets. However, in investigating this you should take into account the business’s trading cycles – for example the accounts for a farming business may show large cash assets because the death/transfer took place after the sale of a harvest or livestock and before the purchase of next year’s seed or stock.
The assets do not have to meet the ownership test (IHTM25301) in order to qualify as assets used in the business under IHTA84/S110. The ownership test is applied to the business as a whole, not to the individual assets of the business. So any capital and assets introduced into the business less than two years before the death/transfer will contribute to the net value of the business provided they were used in the business at the date of death/transfer.
You should consider the extent of business use at the time of the death/transfer. It is does not matter that the assets may have been required for future use in the business.
Once you identify assets which were not used in the business at the time of the death/transfer you should deny business relief on them by reference to IHTA84/S110.
The Special Commissioners considered the meaning and implications of IHTA84/S110 in three cases – in one of which their decision was over-ruled by the High Court.
Hardcastle (executors of Vernede deceased) v IRC (2000) STC (SCD) 532
In this case an unusual point arose concerning the valuation of a Lloyd’s underwriting business. The HMRC account was completed to show the net value of the business (the funds held at Lloyd’s) as £265,508, and the taxpayer deducted from the value of the remaining estate the deceased’s underwriting losses of £301,311. These consisted largely of the excess due under an estate protection plan amounting to £251,900. Business relief was claimed on the figure of £265,508. The executors argued that money owing on the open accounts was not a ‘liability incurred for the purposes of the business’ within IHTA84/S110(b), but the Revenue took the contrary view, with the result that the money owing should by way of contrast be deducted from the value of the assets used in the business.
The appeal by the Executors was allowed; the decision in Van den Berghs Ltd v Clark (1935) 19 TC 390 had made it clear that whilst some trading contracts might be ‘assets used in the business’ ordinary commercial contracts made in the course of trade were not. The open insurance contracts were ordinary commercial contracts for the disposal of the deceased’s product, which was the assumption of risk in return for a premium. As such, if they gave rise to a loss they did not constitute liabilities incurred for the purposes of the business.
We do not consider this judgement can be applied generally and you should consult Technical if this decision is quoted in support of the taxpayer’s view.
IRC v Mallender (executors of Drury-Lowe decd) (2001) STC 514
This case also concerned the estate of a Lloyd’s underwriter. To support his underwriting the deceased had provided Lloyd’s with a bank guarantee, secured by a charge in the bank’s favour over a property let to a tenant. The bank guarantee was limited so that the bank would not be obliged to pay out more than £100,000, but the property charged was worth more than £1m. The Special Commissioners considered that the tenanted property was one of the assets used in the business and its entire value was therefore to be included in the net value of the business.
The High Court disagreed. Jacob J observed that what was used in the business was the guarantee rather than the land itself. Using the language in its ordinary sense he did not believe that it could be said that property merely used to secure a loan or guarantee used in the business could thereby be said to be used in that business.
Hertford v CIR (2005) STC (SCD) 177
In this case the Commissioner was asked to consider whether the whole of a stately home was an asset used in a business. The house, Ragley Hall, is an historic Grade 1 listed house. At the time of the transfer, the exterior was open to the public, to view as a whole, but only 78% of the interior was open to the public as part of the business of running a stately home. The remaining 22% was used exclusively for private residential purposes.
The taxpayers argued that the whole of the building was an asset used in the business for IHTA84/S110 in the sense that the business was one of exhibiting an historic house and most of its contents. Paying visitors would come to see the exterior of the house as much as the interior and it was impossible to apportion the shell of the house between business and non-business use. The Revenue’s view was that only part of the house was an asset used in the business and that, applying S110(b), the residential part was not eligible for business relief.
The Commissioner decided that it as simply not possible to divide the building in any meaningful way and that the whole building was a vital backdrop to the business carried on there. As a result, the whole of the house was an asset of the business and eligible for business relief.
This is an unusual case. We do not consider that the judgement can be applied generally to other business relief claims on buildings since it was the nature of the business in this particular case and the part that the physical structure of the hall played in that business that most influenced the Commissioner’s decision. Any cases in which the Hertford decision is invoked should be referred to Technical once all the relevant facts have been obtained.