Where an asset does not satisfy the 'purposes of the business'
test, the alternative criterion is that at the time of the transfer
it was
required for future use in thebusiness. The focus is on the existing business
and its sustenance or expansion but new ventures may be taken into
account. In all cases, however,
the future use shouldclearly be in contemplation at the valuation date.
In other words, as regards capital expenditure, there has to be
some positive decision or firm intention existing at that time. The
mere toying with an idea or some distant thought should
circumstances change cannot suffice.
If the taxpayer claims that an asset is required for future
use, you should consider carefully
In this context you should not take a 'snapshot' view of the
company at the valuation date.
This was emphasised by the Special Commissioners in the case
of
Brown, Ralph Louis(Executors of) v IRC (1996) Sp C 0083. Although
this case was concerned with s.105(3) it is considered that the
Special Commissioners’ comments are equally relevant in the
context of s.112.
Mr Brown who died in November 1986 had a 99% interest in
Gaslight Entertainments Ltd. The company carried on business as
nightclub operators. In January 1985 the company accepted an
'excellent offer' for the nightclub it owned and operated ' with a
view to finding other nightclubs' for the company. The proceeds of
the sale were placed on deposit.
The Revenue claimed that after the date of sale of the
nightclub the company's business changed to that of holding
investments and thus business relief was precluded by s.105(3).
The Special Commissioner agreed that a business existed
during 1985 and 1986 but it was necessary to look at the company's
operations during the two years prior to the death. The intentions
of the directors should not be looked at in isolation to ascertain
the nature of the business. That is determined by consideration of
both the company's activities
and the intentions of the directors.
The Special Commissioner determined that from the sale of
the nightclub to the date of death the business of the company
could not be considered that of wholly or mainly of making or
holding investments. The decision was supported by the facts that
although the sale proceeds were held in an interest producing
account they were available at short notice to purchase alternative
premises. Efforts had been made by the deceased to find these
premises and the Commissioner thought that were it not for the
untimely illness and death of Mr Brown such efforts would have been
successful. He also mentioned that during 1985 and 1986 the company
continued to deal with administration and marketing.
In the case of
Barclays Bank Trust Co Ltd v CIR [SC 3107/97] the
Special Commissioner heard an appeal by the executor bank against a
Notice of Determination by the Commissioners of Inland Revenue made
under s.221 IHTA 1984 in relation to the deemed transfer on the
death of the owner of 50,000 £1 ordinary shares in J A
Distributors (Leigh on Sea) Limited. The shareholdings of the
deceased and her husband constituted the issued share capital of
the company and it was common ground that the shares qualified in
principle for relief from inheritance tax.
On behalf of the Crown, it was accepted that the company
needed some £150,000 in cash at the valuation date. The point
at issue was whether, having regard to s.112 IHTA 1984, additional
cash to the extent of £300,000 owned by the company at the
date of death (23 November 1990), was an excepted asset which
ranked for no relief from inheritance tax.
It was contended on behalf of the executor bank that the
company had the intention of using its cash resources to purchase
properties owned by another company and it did in fact use over
£300,000 for a venture in 1997. It was submitted that no time
limit is imposed by s.112(2)(b) as, for example, there is in
connection with "roll over" provisions in other Acts.
The Special Commissioner had to determine whether the
£300,000 cash held by the company was required on 23 November
1990 for future use for the purposes of the business. He held that
this was a matter of fact and on the evidence before him he could
not find that it was so required. The Special Commissioner went on
to say "I do not accept that ‘future’ means at any time
in the future nor that ‘was required’ includes the
possibility that the money might be required should an opportunity
arise to make use of the money in two, three or seven year’s
time for the purpose of the business. In my opinion and I so hold
that ‘required’ implies some imperative that the money
will fall to be used upon a given project or for some palpable
business purpose."
Seasonal fluctuations in such assets as stock, debtors and
cash should be taken into account as appropriate.
Some companies such as travel agents and insurance brokers
hold sums of cash (sometimes quite large amounts) in a fiduciary
capacity for some months each year before passing on the cash to
the respective travel operators or insurance companies. Where the
company's year-end falls within the period when the cash is still
held by the company it will not be immediately apparent that the
cash is so held. However the amount of interest earned should give
some indication of the period over which the cash was held.
Similarly in times of recession a company may hold
significant amounts of cash and/or other investments and in a
period when that company is making losses the income stream could
be considered as supporting the company's main trading activity.
Any case where cash is used shortly after the taxable event
by a company in a 'purchase of own shares' scheme should be
referred to the Appeals Team.
| Additional Guidance: SVM150000 |
