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HMRC internal manual

Shares and Assets Valuation Manual

IHT Business Property Relief: Practical considerations, including restriction of relief under s.107(2)

Practical considerations

The ownership tests have to be satisfied in respect of the particular shares transferred. Where the transferor acquired additional shares during the 2 years prior to the transfer and it is claimed that the shares transferred derived from the holding acquired earlier, the agents should be asked to provide the necessary evidence - such as a copy of the relevant entries in the register of transfers or of the relevant share certificates. However if, exceptionally, firm evidence does not exist (for example because, following a reorganisation of the share capital, a fresh certificate was issued to cover the whole of the transferor’s holding) relief may be given to the extent that it would be available on the basis of a ‘first in - first out’ assumption.

For the purposes of the two-year ownership test property acquired on an earlier death is deemed to have been owned from the date of death - or, if the earlier death was that of a spouse, from the date that spouse acquired the property (s.108). There is however no provision corresponding to the latter for lifetime transfers between spouses; in that case the ownership period of the transferee spouse runs only from the time of the transfer to him/her.

A bonus or rights issue should not normally be regarded as a newly acquired holding for the purpose of the ownership tests. Provided the bonus or rights shares were issued in proportion to all the shares of a company - or to all the shares of a particular share class - the allotment to the transferor will come within s.107(4). Care needs to be taken with rights issues, however, and all cases involving them should be referred to the Litigation and Technical Advice Team (LTAT).

Replacement provisions - s.107(2)

Under s.107(2) where the ownership test is satisfied by virtue of s.107(1) relief is restricted to what it would have been had the replacement - or any earlier replacement to be taken into account - not been made. This restriction applies to all replacements, except a replacement involving the company’s take-over of a former unincorporated business of the controlling shareholder.

The restrictions, where applicable, limit relief to the lowest value - namely of the transferred property, the replaced property, and any earlier replaced property taken into account. For this purpose the value of any replaced property should be ascertained at the time of replacement.

S107(2) is an anti-avoidance provision and its purpose is to prevent a person who has qualified for relief from purchasing a much more expensive property shortly before death or making a transfer.

The approach to S107(2) should be practical.  If there is any indication that the deceased/transferor’s resources were being rearranged into considerably more extensive property to obtain increased relief on the death/transfer, refer the case to LTAT.  Otherwise adopt a reasonable approach aimed at quantifying and agreeing the restricted relief in a practical way.  An example of the approach to adopt can be found at SVM112090 which deals with the equivalent provisions for replacement property for Agricultural Property Relief.

It may be noted that these replacement provisions relate to any replaced property which constituted ‘relevant business property’ within s.105(1) and not just to shares and securities.

  Additional Guidance: SVM150000