Where a company holds shares in subsidiaries, it is possible
that those shares may be regarded as investments for the purposes
of s.105(3). However, s.105(4)(b) preserves relief where a company
is wholly or mainly engaged in being a holding company of one or
more subsidiaries whose business(es) is not/are not wholly or
mainly investment.
For this purpose 'holding company' and 'subsidiary company'
have the same meaning as in s.736(1) of the Companies Act 1985, as
amended (in relation to events from 1 November 1990) by s.144
Companies Act 1989. These meanings are:
'A company is a "subsidiary" of another company, its
"holding company", if that other company-
or if it is a subsidiary of a company which is itself a subsidiary of that other company.
[There is a similar definition in s.1159 Companies Act 2006.]
This last point is relevant when considering the impact of
section 111 (see below)
Subject to the paragraphs below relating to s.111 the only
grounds on which relief may be denied under s.105(3) are if the
business of the holding and subsidiary companies viewed
as a whole does not fall within s.105(4)(b). The
test is a factual one. Accordingly, the activities, income sources
and asset values of the parent and each of its subsidiaries must be
examined to form a picture of the group business.
Example
| Company A is merely a holding company with two subsidiaries, B and C. B deals in land and buildings and carries out a minor activity of building and construction. Company C is an investment company with a large portfolio of quoted securities. The group viewed as a whole does not qualify for relief under s.105(3). |
Even where the shares or securities in the holding company
qualify for relief under s.105(4)(b), s.111 provides an important
restriction to relief if the business of any of its subsidiaries
falls within the excluded class (e.g. wholly or mainly investment).
In this case, business relief is available on what the value of the
shares in the holding company would have been if the non-qualifying
subsidiary(ies) was/were excluded from the group. It should be
noted that it is not normally correct to apportion the agreed value
of the shares in the ratio that qualifying and non-qualifying
assets bear to one another.
The restriction does not apply where:
The legislation leads to an anomaly with which valuers should be
familiar. Shares in a company which has no subsidiaries, which is
mainly engaged in trading but carries on a minor business of making
or holding investments will qualify for relief in full. However, if
the investment business were carried on by a wholly owned
subsidiary of the trading company, and the investment business were
carried on as the principal activity of the subsidiary, relief
would be restricted by s.111. This is illustrated in the following
examples.
Example 1
| Company A is a holding company with two subsidiaries, B and C. B is an engineering company and C deals in land and buildings. Overall, the engineering business predominates. Relief is restricted to that part of the value of A which is attributable to the trading activity (i.e. B). |
Example 2
| Company A is itself mainly an engineering company with a minor activity of dealing in land or buildings. The assets solely attributable to the latter activity are not excepted assets under s.112(2) - see this chapter at SVM111210. S.105(3) will not be in point so that relief will be given in full. |
Example 3
| Company A has two subsidiary companies B and C. B is wholly an engineering company. C is mainly engaged in engineering but also carries on a minor business of dealing in land and buildings. In this example relief on company C cannot be denied under s.111. Nor can relief be denied under s.112 on company C's minor activity of dealing in land and buildings (see Example 2 and this chapter at SVM111210) |
Valuers will not necessarily be able to make a judgement as
to whether any subsidiary requires to be left out of account under
s.111 on the basis of consolidated accounts alone. It is a matter
of judgement whether it is necessary to call for all subsidiary
accounts in a particular case.
Cases will arise where there are intermediate subsidiary
companies.
Example 4
| Company A has two wholly owned subsidiaries, Company B and Company C. Company B itself has three wholly owned subsidiaries: Companies D, E and F. For the purposes of section 111 Companies D, E and F will each be regarded as subsidiaries of Company A. |
If all the companies in the Group were trading except for
Company F which was wholly engaged in making or holding
investments, Company F would need to be taken into account in
calculating a restriction of business relief. Whether shares in
Company A would qualify under s.105(3) would depend on a
consideration of the facts, as would the treatment of Company B
This is not a straightforward subject. In all cases you
should consider whether leaving subsidiaries of small value out of
account would in fact affect the overall value. This is
especially so in the case of minority holdings
where the valuation may have been primarily based on the dividend
or earnings stream. If it would not affect the overall chargeable
value, or the effect would be marginal, there may be no point in
proceeding with the point.
Any cases of doubt should be referred to the Appeals
Team.
| Additional Guidance: SVM150000 |
