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HMRC internal manual

Lloyd's Manual

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HM Revenue & Customs
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Inheritance tax: Names: business property relief

The value of certain business assets can be reduced or eliminated for IHT purposes.Business property relief (BPR) under IHTA84/S105 is due on the net value of the business(IHTA84/S110). In principle, ancillary trust fund assets and the value of assets andaccumulated income and gains held in the special reserve fund attract full BPR.

Ancillary trust fund assets and other Funds at Lloyd’s (FAL)

In practice, the total value of FAL assets will only attract full BPR if in the view ofShares and Assets Valuation (SAV) the amount of FAL is commensurate with the amount ofunderwriting business that was being written by the Name. As a rule of thumb, SAV wouldnot normally seek to restrict BPR if the value of FAL assets is not substantially greaterthan the minimum FAL requirement.

Historically, the FAL gearing ratio (the FAL a Name was required to provide in proportionto premium limit) varied according to the Name’s declared wealth, the amount ofpremium income being written and the nature of participation. From 2001, all classes ofNames were required to put up FAL equal to 40% of their premium limit – thiscorresponds to a gearing ratio of 2.5:1. Under the risk based capital approach that nowapplies, see LLM1220, some members are required to put up ahigher level of capital.

SAV generally operate on the lower ratio requirement notwithstanding the Name may havebeen writing a greater level of business with a higher geared FAL ratio.

The minimum FAL level is, however, only a guideline and the nature and risk of thebusiness underwritten is also considered. SAV do accept that a prudent underwriter who waswriting a large line, for example on a nuclear risk syndicate, would most probablymaintain a level of reserves significantly higher than if he was writing the same line ona motor syndicate. SAV would however investigate claims for BPR where, in their opinion,the total value of FAL assets is excessive in relation to the level and nature of thebusiness being underwritten.

Special reserve fund (SRF) assets

The assets within the fund are quarantined so that they can only be utilised to meettrading losses. As such, the fund qualifies for BPR. However, with effect from the 1999account, the SRF can be used as part of Funds at Lloyd’s (FAL). As with other FAL,the level of funds in the SRF is subject to scrutiny as to the amount required to supportthe business underwritten.

Bank guarantees and letters of credit

Many Names, particularly overseas Names, arrange for all or part of their Lloyd’sDeposit or reserve requirements to be met in the form of a guarantee or letter of credit.Although a bank guarantee or letter of credit does not in itself constitute an asset forIHT purposes, the value of the underlying assets deposited with the bank as collateralsecurity does qualify for BPR.

The amount of relief cannot exceed the nominal value of the guarantee but willnevertheless be dependent on the market value of the collateral assets. There is norestriction of relief by reference to the nature of the underlying assets supporting theguarantee or letter of credit, but SAV will treat the value of the underlying assets asreduced by the amount of the guarantee or letter of credit for the purpose of giving anyother reliefs or exemptions.

Syndicate capacity

Proceeds from the sale of capacity at auction do not form part of the composite valueof an underwriting interest at the date of death, but nevertheless attract BPR at 100%.