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
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
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%.