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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: Practical approach

Having regard to the term ‘business concerned’ [s.112(2)(a)], you will need to consider the nature and extent of the company’s business operation. If it has trading and investment interests, you will need to consider whether the latter is part of a hybrid business activity. If you conclude that a hybrid company is mainly trading and that business relief is not precluded under s.105(3), the “excepted assets” rules will not apply to investments constituting part of the hybrid business. The “excepted assets” rules can only apply to assets which are not used in either part of the hybrid’s business.

A degree of activity is required to constitute a business, and whether investments involve sufficient activity must depend on their nature and the particular facts.

It is a question of evidence whether a particular asset was used wholly or mainly for business purposes during the relevant period. However, the requirement as to user should be interpreted reasonably in the case of those companies which appear to be pursuing normal business activities rather than serving as a repository for non-business assets. Whether or not assets are being used should be a matter of fact. You should take into account the actual activities carried on by the company.

There is also a subjective element, namely how matters are viewed by the directors and members of the company and how the company’s business is described in the Directors’ Report accompanying the annual accounts.

Surplus cash

Surplus cash which is excessive for the present and future needs of a trading business should be regarded as in the non-business category and hence as an ‘excepted asset’. This is because it is neither used wholly or mainly for the purposes of the trading business nor required for future use for those purposes. Furthermore, it cannot be regarded as a separate investment business nor as part of the hybrid business, as it requires no effort and involves no activity. It is a factual test.

  • Was the cash used for the business?
  • Was the cash used to finance the business carried on by the company?
  • How much cash did the company use regularly?
  • What were its short-term cash requirements?
  • Does the amount of cash fluctuate?

Shares and Securities

In the case of shares and securities, much will turn on the size of the holdings, the time spent on their management (including buying and selling) and the reason for their acquisition. You should however, bear in mind the conclusion of the Privy Council in American Leaf Co v Director General [1979 ] AC676 that “in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business.” If a company does carry on an investment business ancillary to its trading business, it cannot be said that the investments made have not been used for the purposes of the hybrid (mainly trading, partly investment) business. Thus those investments cannot be regarded as excepted assets.

Assets used for personal benefit

S.112(6) is aimed at conspicuous and substantial assets for example, a house, flat, private yacht or (collection of) expensive chattels which although represented as a business asset are simply held by the company as a device for providing private benefit to the persons in question. A house or other dwelling is the likeliest asset you will encounter under this heading. If such assets were used wholly or mainly for the personal benefit of the transferor or of a person connected with him/her (the meaning of “connected with” is provided by s.270) they are not to be regarded (under ss.(6)) as used wholly or mainly for the purposes of the business.

In practice there are many cases - particularly involving minority shareholdings - where the exclusion of an asset would make little or no difference to the value transferred. For example the value of a 10% shareholding is unlikely to be much affected by the exclusion of a private boat. A similar situation may also occur with a control shareholding where a company is being valued on a capitalisation as opposed to an assets basis. Where it appears therefore that the effect of the exclusion of a particular asset on the value transferred will be small, the matter should not be pursued.

Where, however, shares are being valued by reference to the capitalisation value of a company, you should remember that the value of any substantial non-business asset ought to be added to the capitalisation value of the company. The added value of the non-business asset will clearly have to be excluded from relief.

  Additional Guidance: SVM150000