When you investigate whether there are any assets excluded from
relief (
IHTM25341) because they were not used
in the business, you should examine the accounts and information
supplied by the taxpayer to establish whether the assets shown were
in fact used in the business at the time of the death/transfer.
An asset described as a business asset or included in
business accounts will not necessarily be used in the business.
This applies particularly to cash, bank accounts, building society
accounts and similar assets. However, in investigating this you
should take into account the business’s trading cycles
– for example the accounts for a farming business may show
large cash assets because the death/transfer took place after the
sale of a harvest or livestock and before the purchase of next
year's seed or stock.
The assets do not have to meet the ownership test (
IHTM25301) in order to qualify as
assets used in the business under IHTA84/S110. The ownership test
is applied to the business as a whole, not to the individual assets
of the business. So any capital and assets introduced into the
business less than two years before the death/transfer will
contribute to the net value of the business provided they were used
in the business at the date of death/transfer.
You should consider the extent of business use at the time of
the death/transfer. It is immaterial that the assets may have been
required for future use in the business.
Once you identify assets which were not used in the business
at the time of the death/transfer you should deny business relief
on them by reference to IHTA84/S110.
The Special Commissioners have considered the meaning and
implications of IHTA84/S110 in three recent cases – in one of
which their decision was in fact over-ruled by the High Court. In
Hardcastle & Anor. (Executors of Vernede Deceased) v IRC
(SpC00259) there arose an unusual point concerning the valuation of
a Lloyd’s underwriting business. In that case the HMRC
account was completed to show the net value of the business (the
funds held at Lloyd’s) in the sum of £265,508, and
sought to deduct from the value of the remaining estate the
deceased’s underwriting losses of £301,311. These
consisted largely of the excess due under an estate protection plan
amounting to £251,900. Business relief was claimed on the
figure of £265,508. The executors argued that money owing on
the open accounts was not a “liability incurred for the
purposes of the business” within IHTA84/S110 (b), but the
Revenue took the contrary view, with the result that the money
owing should by way of contrast be deducted from the value of the
assets used in the business. The appeal by the Executors was
allowed; the decision in Van den Berghs Ltd v Clark (1935) 19 TC
390 had made it clear that whilst some trading contracts might be
“assets used in the business” ordinary commercial
contracts made in the course of trade were not. The open insurance
contracts were ordinary commercial contracts for the disposal of
the deceased’s product, which was the assumption of risk in
return for a premium. As such, if they gave rise to a loss they did
not constitute liabilities incurred for the purposes of the
business.
IRC v Mallender (2001) STC 514 also concerned the estate of a
Lloyd’s underwriter. To support his underwriting the deceased
had provided Lloyd’s with a bank guarantee, secured by a
charge in the bank’s favour over a property let to a tenant.
The bank guarantee was limited so that the bank would not be
obliged to pay out more than £100,000, but the property
charged was worth more than £1m. The Special Commissioners
considered that the tenanted property was one of the assets used in
the business and its entire value was therefore to be included in
the net value of the business.
The High Court disagreed. Jacob J observed that what was used
in the business was the guarantee rather than the land itself.
Using the language in its ordinary sense he did not believe that it
could be said that property merely used to secure a loan or
guarantee used in the business could thereby be said to be used in
that business.
In
Hertford v CIR (SpC444) the
Commissioner was asked to consider whether the whole of a stately
home was an asset used in a business. The house, Ragley Hall, is an
historic Grade 1 listed house. At the time of the transfer, the
exterior was open to the public, to view as a whole, but only 78%of
the interior was open to the public as part of the business of
running a stately home. The remaining 22% was used exclusively for
private residential purposes.
The taxpayers argued that the whole of the building was an
asset used in the business for s.110 IHTA 1984 in the sense that
the business was one of exhibiting an historic house and most of
its contents. Paying visitors would come to see the exterior of the
house as much as the interior and it was impossible to apportion
the shell of the house between business and non-business use. The
Revenue's view was that only part of the house was an asset used in
the business and that, applying s.110(b), the residential part was
not eligible for Business Relief.
The Commissioner decided that it as simply not possible to
divide the building in any meaningful way and that the whole
building was a vital backdrop to the business carried on there. As
a result, the whole of the house was an asset of the business and
eligible for BR.
This is an unusual case. It is not considered that the
judgement can be applied generally to other BR claims on buildings
since it was the nature of the business in this particular case and
the part that the physical structure of the hall played in that
business that most influenced the Commissioner's decision. Any
cases in which the
Hertford decision is invoked should be
referred to TG once all the relevant facts have been obtained.
