The value of certain business assets can be reduced or
eliminated for IHT purposes. Business property relief (BPR) under
IHTA84/S105 is due on the net value of the business (IHTA84/S110).
In principle, ancillary trust fund assets and the value of assets
and accumulated income and gains held in the special reserve fund
attract full BPR.
In practice, the total value of FAL assets will only attract
full BPR if in the view of Shares and Assets Valuation (SAV) the
amount of FAL is commensurate with the amount of underwriting
business that was being written by the Name. As a rule of thumb,
SAV would not normally seek to restrict BPR if the value of FAL
assets is not substantially greater than the minimum FAL
requirement.
Historically, the FAL gearing ratio (the FAL a Name was
required to provide in proportion to premium limit) varied
according to the Name’s declared wealth, the amount of
premium income being written and the nature of participation. From
2001, all classes of Names were required to put up FAL equal to 40%
of their premium limit – this corresponds to a gearing ratio
of 2.5:1. Under the risk based capital approach that now applies,
see
LLM1220, some members are required to put
up a higher level of capital.
SAV generally operate on the lower ratio requirement
notwithstanding the Name may have been writing a greater level of
business with a higher geared FAL ratio.
The minimum FAL level is, however, only a guideline and the
nature and risk of the business underwritten is also considered.
SAV do accept that a prudent underwriter who was writing a large
line, for example on a nuclear risk syndicate, would most probably
maintain a level of reserves significantly higher than if he was
writing the same line on a motor syndicate. SAV would however
investigate claims for BPR where, in their opinion, the total value
of FAL assets is excessive in relation to the level and nature of
the business being underwritten.
The assets within the fund are quarantined so that they can only be utilised to meet trading losses. As such, the fund qualifies for BPR. However, with effect from the 1999 account, the SRF can be used as part of Funds at Lloyd’s (FAL). As with other FAL, the level of funds in the SRF is subject to scrutiny as to the amount required to support the business underwritten.
Many Names, particularly overseas Names, arrange for all or part
of their Lloyd’s Deposit or reserve requirements to be met in
the form of a guarantee or letter of credit. Although a bank
guarantee or letter of credit does not in itself constitute an
asset for IHT purposes, the value of the underlying assets
deposited with the bank as collateral security does qualify for
BPR.
The amount of relief cannot exceed the nominal value of the
guarantee but will nevertheless be dependent on the market value of
the collateral assets. There is no restriction of relief by
reference to the nature of the underlying assets supporting the
guarantee or letter of credit, but SAV will treat the value of the
underlying assets as reduced by the amount of the guarantee or
letter of credit for the purpose of giving any other reliefs or
exemptions.
Proceeds from the sale of capacity at auction do not form part of the composite value of an underwriting interest at the date of death, but nevertheless attract BPR at 100%.
