Introduction to this document

Company trading status report

Business property relief is available on shares in unquoted companies if certain conditions are met. This means 100% of the market value of those shares will escape inheritance tax. However, HMRC can take this relief away if the business consists “wholly or mainly” of non-trading activities such as holding investments. How should you set about persuading him otherwise?

Wholly or mainly

When considering this test, HMRC guidance is that its interpretation of this is literal, i.e. a 51% test. This will be applied not only to turnover/profits but all aspects of the business such as capital employed, time spent by directors and employees, etc. It’s particularly important where a business has several different sources of income.

For example, in Farmer v IRC (1999) only a small part of the farm was rented out, but the rental income (investment not business) was significant in relation to the farm’s income. The particular features considered in the Farmer case were: (1) the overall context of the business; (2) capital employed; (3) employee time; (4) turnover; and (5) profits. The only test which suggested that the let property activity was substantial was profits. Since four out of the five tests supported the view that, looking at the business as a whole, the business consisted mainly of farming activities, the claim for business property relief (BPR) was allowed.

Excepted assets

BPR will also be lost to the extent that the value of the shares in a company is attributable to “excepted assets”. Assets will be excepted assets if they meet either of two tests:

  • “Past use” test. The asset was not used wholly or mainly for business purposes throughout the whole of the last two years of the relevant period (broadly, the period between date of ownership and transfer of the shares, s.112(5)).

“Future use” test. The asset is not required for future use in the business.In considering whether the cash is required for future use, it’s not sufficient to be holding the cash speculatively for unspecified future projects, there needs to be a clear earmarked purpose for it. As with most things HMRC are wont to query, good documentation, minutes of meetings, etc. will assist with putting a case together in this respect.

Use our Trading Status Report board minutes to make it clear to HMRC why 100% BPR should still apply to these shares.