IHTM25224 - Land and buildings, machinery and plant: Transferor's interest in the occupying company or partnership

Under IHTA84/S105 (6) the land, etc, specified in IHTA84/S105 (1)(d) does not qualify for relief unless the transferor's interest in the partnership is, or shares or securities of the company are, relevant business property in relation to the transfer. This means, for example, that the landlord of a factory cannot get the relief by purchasing a controlling interest in the tenant company or by becoming a partner in the tenant firm shortly before his death; the two years minimum ownership requirement in IHTA84/S106 prevents the purchased interests being relevant business property.

Shares and Assets Valuation (SAV) will advise whether the transferor had control of a user company at the relevant time.

The importance of the deceased having control of an occupying company is illustrated by Walding v IRC [1996] STC 13. Mrs K L Walding died 14 April 1987. Her estate included 45 shares in Leeways Packaging Services Ltd and factory units occupied by the company. The executors claimed business relief for the factory units under IHTA84/S105 (1)(d).

The availability of relief depended on whether the deceased had control of the company as required by IHTA84/S105 (1)(d). That was the issue before the Court. There was no dispute about the deceased’s 45 shares because they qualified for relief at 50% whether or not the deceased had control of the company (IHTA84/S105 (1)(bb)).

The company’s issued capital was 100 shares. Of the 55 shares not owned by the deceased, 31 were in the name of the deceased’s son or his wife. The remaining 24 shares were in the name of her grandson who was not quite five years old.

For the factory units to come within IHTA84/S105 (1)(d), the deceased had to have control of the company within IHTA84/S269 (1). This depended on whether the 24 shares vested in the grandson were relevant. For the purposes of argument, the Revenue accepted that he did not have the personal capacity necessary to exercise his rights of voting. (This concession by the Revenue was not general and certainly does not extend to one who is near the age of majority.)

The executors argued that, for the purposes of IHTA84/S269 (1), it was necessary to have regard to the personal capacity (or incapacity) of the registered shareholder, who is the person who has conferred upon him or her the votes attached to the shares. They found support for their argument in the use of the word “capable” in the phrase “votes capable of being exercised” in the subsection. Accordingly, they said, the grandson’s 24 shares had to be disregarded, reducing the number of shares to be considered to 76. On this basis, the deceased’s 45 carried full control.

Knox J rejected this argument. Implicit in IHTA84/S269 (1) are two categories of votes that may exist:

• votes on questions which do not affect the company as a whole, and
• voting rights on all questions affecting the company.

It is the latter category which counts for the purposes of IHTA84/S269. In the judge’s view, the reference to capability in IHTA84/S269 (1) is to identify the particular category of votes aimed at, not to the personal capacity of the registered shareholder.

That construction was fortified by consideration of the practical consequences of the conflicting arguments. That of the executors would cause practical problems. On the other hand, the construction the judge favoured gives all taxpayers an equal right to relief regardless of any mental or physical capacity or incapacity that they might have.

Accordingly, the factory units occupied by the company did not qualify for business relief.