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HMRC internal manual

Shares and Assets Valuation Manual

IHT Business Property Relief: Future use

Where an asset does not satisfy the ‘purposes of the business’ test, the alternative criterion is that at the time of the transfer it was required for future use in the business. The focus is on the existing business and its sustenance or expansion but new ventures may be taken into account. In all cases, however, the future use should clearly be in contemplation at the valuation date. In other words, as regards capital expenditure, there has to be some positive decision or firm intention existing at that time. The mere toying with an idea or some distant thought should circumstances change cannot suffice.

If the taxpayer claims that an asset is required for future use, you should consider carefully

  • the nature and previous history of the company’s business
  • the available evidence as to any prospective development or expansion.

In this context you should not take a ‘snapshot’ view of the company at the valuation date.

This was emphasised by the Special Commissioners in the case of Brown, Ralph Louis (Executors of) v IRC (1996) Sp C 0083. Although this case was concerned with s.105(3) it is considered that the Special Commissioners’ comments are equally relevant in the context of s.112.

Mr Brown who died in November 1986 had a 99% interest in Gaslight Entertainments Ltd. The company carried on business as nightclub operators. In January 1985 the company accepted an ‘excellent offer’ for the nightclub it owned and operated ‘ with a view to finding other nightclubs’ for the company. The proceeds of the sale were placed on deposit.

The Revenue claimed that after the date of sale of the nightclub the company’s business changed to that of holding investments and thus business relief was precluded by s.105(3).

The Special Commissioner agreed that a business existed during 1985 and 1986 but it was necessary to look at the company’s operations during the two years prior to the death. The intentions of the directors should not be looked at in isolation to ascertain the nature of the business. That is determined by consideration of both the company’s activities and the intentions of the directors.

The Special Commissioner determined that from the sale of the nightclub to the date of death the business of the company could not be considered that of wholly or mainly of making or holding investments. The decision was supported by the facts that although the sale proceeds were held in an interest producing account they were available at short notice to purchase alternative premises. Efforts had been made by the deceased to find these premises and the Commissioner thought that were it not for the untimely illness and death of Mr Brown such efforts would have been successful. He also mentioned that during 1985 and 1986 the company continued to deal with administration and marketing.

In the case of Barclays Bank Trust Co Ltd v CIR [SC 3107/97] the Special Commissioner heard an appeal by the executor bank against a Notice of Determination by the Commissioners of Inland Revenue made under s.221 IHTA 1984 in relation to the deemed transfer on the death of the owner of 50,000 £1 ordinary shares in J A Distributors (Leigh on Sea) Limited. The shareholdings of the deceased and her husband constituted the issued share capital of the company and it was common ground that the shares qualified in principle for relief from inheritance tax.

On behalf of the Crown, it was accepted that the company needed some £150,000 in cash at the valuation date. The point at issue was whether, having regard to s.112 IHTA 1984, additional cash to the extent of £300,000 owned by the company at the date of death (23 November 1990), was an excepted asset which ranked for no relief from inheritance tax.

It was contended on behalf of the executor bank that the company had the intention of using its cash resources to purchase properties owned by another company and it did in fact use over £300,000 for a venture in 1997. It was submitted that no time limit is imposed by s.112(2)(b) as, for example, there is in connection with “roll over” provisions in other Acts.

The Special Commissioner had to determine whether the £300,000 cash held by the company was required on 23 November 1990 for future use for the purposes of the business. He held that this was a matter of fact and on the evidence before him he could not find that it was so required. The Special Commissioner went on to say “I do not accept that ‘future’ means at any time in the future nor that ‘was required’ includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven year’s time for the purpose of the business. In my opinion and I so hold that ‘required’ implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose.”

Seasonal fluctuations in such assets as stock, debtors and cash should be taken into account as appropriate.

Some companies such as travel agents and insurance brokers hold sums of cash (sometimes quite large amounts) in a fiduciary capacity for some months each year before passing on the cash to the respective travel operators or insurance companies. Where the company’s year-end falls within the period when the cash is still held by the company it will not be immediately apparent that the cash is so held. However the amount of interest earned should give some indication of the period over which the cash was held.

Similarly in times of recession a company may hold significant amounts of cash and/or other investments and in a period when that company is making losses the income stream could be considered as supporting the company’s main trading activity.

Any case where cash is used shortly after the taxable event by a company in a ‘purchase of own shares’ scheme should be referred to the Litigation and Technical Advice Team (LTAT).

  Additional Guidance: SVM150000