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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: Replacement provisions

The requirement that the original property should be retained by the transferee is relaxed, firstly by s.113A(6) where as a result of a reorganisation and so on, new shares have been issued in place of those originally transferred and secondly by s.113B where the transferee has disposed of the property originally transferred but replaced it with other qualifying property.

Replacement shares

S.113A(6) applies where shares owned by the transferee immediately before the death of the transferor (or earlier death of the transferee) either

  1. were received by the transferee as a result, broadly, of a reorganisation of share capital or take-over bid and would under any of the provisions of sections 126-136 TCGA 1992 be identified with the shares (or part of them) received by the transferee under the transfer

or

  1. were issued to the transferee in consideration of the sale to the company of the business, or interest in a business, consisting of some or all of the original property.

Where these conditions are satisfied the shares are treated for the purposes of s.113A as the original property.

Example

A gives his son 1,000 £1 shares in Z Ltd. The company splits its share capital and the original holding transferred is represented by 10,000 10p shares at the date of A’s death. The new holding is treated as the original property. If company Z had been taken over by company Y so that at A’s death the original holding was represented by 500 £1 shares in Y Ltd, the new holding would also be treated as the original property.

Replacement property generally

S.113B relaxes the conditions in s.113A to preserve the relief where, very broadly, the transferee has sold all or part of the original property and invested the whole of the proceeds in the purchase of qualifying business property.

S.113B provides that if all the following conditions are satisfied relief is available.

  1. The whole of the consideration received on the disposal must have been applied by the transferee in acquiring other property.
  2. The other property is acquired, or a binding contract for its acquisition is entered into, within three years of the disposal or such longer period as the Board may allow.
  3. The disposal and acquisition are both made in transactions at arm’s length or on terms such as might be expected to be included in a transaction at arm’s length.
  4. Subject to the comments regarding the three year period below, the other property is owned by the transferee immediately before the transferor’s death or, where that is earlier, the transferee’s death, and is not, at that time, subject to a binding contract for sale.
  5. Throughout the period from the date of the chargeable transfer to the date of death (ignoring any period between disposal and acquisition) the transferee owned either the property originally given (including any property deemed to be the property originally given under s.113A(6)) or the other property.
  6. Relief would have been available (ignoring the minimum period of ownership provisions) in respect of the other property had it been disposed of by the transferee immediately before the death. [This rule applies whenever the transferor/transferee dies - s.184 FA 1996 did not amend this requirement in respect of replacement property.]

The three year period may extend beyond the transferor’s death, the condition at (4) above not applying where the original property has been disposed of before the death and replacement property is acquired or contracted for within three years of the disposal or such longer period as the Board allows.

If the replacement property consists of shares and the share capital is re-organised or the company is taken over in exchange for other shares before the death, the shares received in substitution are treated as the replacement property;

Property is treated as disposed of at the time a binding contract for its disposal is entered into.

Example

B gives shares in an unquoted trading company, ABC Ltd, to his daughter in 2000. In 2003, the daughter sells the shares in an arm’s length transaction and in 2004 reinvests all the proceeds of sale in another unquoted trading company, XYZ Ltd. B dies in 2005. The failed PET qualifies for business relief, as the daughter owns the replacement shares at B’s death and they were then relevant business property.

B gives shares in an unquoted trading company, ABC Ltd, to his daughter in 2000. In 2003, the daughter sells the shares in an arm’s length transaction and in 2004 reinvests all the proceeds of sale in another unquoted trading company, XYZ Ltd. B dies in 2005. The failed PET qualifies for business relief, as the daughter owns the replacement shares at B’s death and they were then relevant business property.

S.113B is a complex provision and the IHT Technical Advisor will consider how it applies to any particular case. The SAV Valuer’s task is likely to be confined to giving the IHT Caseworker any relevant information we have and in particular advising whether any replacement property would indeed be relevant business property in relation to a notional transfer by the transferee at the death of the transferor/transferee - s.113B(3)(c). Usually this will mean confirming the unquoted status of the replacement shares and confirming that relief in respect of them is not ruled out in view of the company’s activities (s.105(3) or s.111), assets (s.112) or as a result of being subject to a binding contract for sale (s.113).

  Additional Guidance: SVM150000