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HMRC internal manual

Shares and Assets Valuation Manual

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HM Revenue & Customs
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IHT Business Property Relief: Property subject to a contract for sale

Under s.113 shares in or securities of a company which are subject to a binding contract for sale are not relevant business property. The exception is where the shares or securities are sold for the purposes of reconstruction or amalgamation.

“Buy and sell” arrangements

Shareholder directors of companies may enter into agreements between themselves to the effect that
 

  • when one of them dies before retirement
  • the surviving directors may purchase the shares of the one who has died.

The funds for the purchase may be provided by appropriate life assurance policies.

Only most exceptionally does such an agreement constitute a binding contract for sale within s.113. For the agreement to come within s.113 it has to provide
 

  • for the shares of the deceased shareholder to pass to his or her personal representatives
  • that the personal representatives are required to sell the shares to the surviving shareholders
  • who are in terms obliged to buy them.

When these requirements are satisfied, the agreement is called a “buy and sell” agreement and it prevents the interest or shares concerned qualifying for BR.

Disqualification does not however apply to shares or securities in companies whose articles require the personal representatives of a deceased shareholder to offer his shares for sale to the company, other shareholders or directors - provided there is no obligation on the offerees to buy. If however, exceptionally, one side is bound to offer the shares or securities and the other side is bound to purchase them, relief should (as with ‘buy and sell’ agreements) be denied.

Property should not be regarded as disqualified under this provision where the transfer of value is itself a sale for partial consideration.

Valuers should notify the Appeals Team of any ‘buy and sell’ agreement that comes to light during the course of negotiations.

Such sales are generally disclosed by the taxpayers. However, in any case where it is not apparent whether a sale has or has not taken place, and the value transferred appears likely to exceed £250,000 before business relief, valuers should ask the parties to state whether the transferred shares have been sold and, if so, the date of the sale and when negotiations first commenced. Where a sale pursuant to a buy and sell agreement is disclosed the case should similarly be referred to SAV Appeals.

Subject to the above, unless there is some indication that a contract for sale existed at the time of transfer, there is no necessity to enquire in every case.

Occasionally agreements are seen where
 

  1. the deceased’s interest passes to the surviving shareholders, who are required to pay the personal representatives a particular price
     

or
 

  1. the deceased’s interest falls into the estate, but with an option for the surviving shareholders to purchase it.
     

Agreements of these types do not constitute contracts for sale. They do not prevent the interest from qualifying for BR by reason of s.113.

Lifetime transfer of relievable property followed by a sale

Background

Lifetime transfers of relievable property are sometimes made after a sale has been arranged or negotiated but shortly before the binding contract is entered into. When this happens we need to consider whether BR is available.

If, shortly after a transfer of unquoted shares, there is a transaction (such as a flotation, a take-over or winding up of the company) you should refer to SAV Appeals via your team leader.

Cases have come to light where a lifetime transfer of shares was followed shortly afterwards by a sale of the company - the transfer thereby being, in effect, a transfer of part of the company’s sale price. The agents/taxpayers nonetheless have argued for a lower value per share than that represented by the sale price and/or claimed business relief. They have argued that there was no binding contract for sale, within s.113 IHTA 1984, at the time of the transfer.

The following situations must be referred to SAV Appeals:

  • all IHT lifetime transfers where it appears that a sale of the company, or of part of the share capital including the transferred shares, occurred within six months following the transfer, and
  • any other such case where a sale occurred outside the six months period but the circumstances suggest that the sale may have been in prospect at the time of the lifetime transfer.

If there was no binding contract for sale at the date of transfer/death Business Relief will be due but the position needs to be carefully checked.

Questions to ask before reference to the Appeals Team

If a sale takes place in the circumstances described above you should

  • ascertain the facts, and
  • obtain any relevant document relating to the transfer and all the documents by which the sale was

   - agreed and
   - effected.

  Additional Guidance: SVM150000