Section 11: relief for business property
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
Relief for Business Property
Ss 103-114 Inheritance Tax Act 1984 provide relief for a transfer of value made on or after 18 March 1986 if the whole or part of the value transferred relates to “relevant business property” (see para 11.15 below). This relief is given by means of a percentage reduction in any value transferred which is attributable to such property. The reduction is made by HMRC(IHT) before applying exemptions or grossing up. The DV should therefore report the value transferred without reduction.
In this Section the statutory references are to sections in IHTA 1984 unless indicated otherwise.
The detailed provisions are complex but broadly speaking in order to qualify for relief the property must:
- Be relevant business property as specified in s.105. See para 11.15 below.
- Satisfy conditions as to a two year minimum period of ownership (ss.106-109). See para 11.18 below.
- Assets must satisfy conditions as to a minimum period of use for the purposes of the business or, (apart from assets on loan to a partnership or company), be required at the time of the transfer for future use for those purposes (s.112). See para 11.31 below.
- Satisfy additional conditions when (additional) tax becomes payable on a lifetime transfer because of the death of the transferor within 7 years (see para 11.9 below).
Relief for relevant business property is available subject to conditions for transfers of value made and chargeable during the transferor’s lifetime, PETs chargeable on the transferor’s death within 7 years, on death or in respect of periodic IHT charges relating to settled property.
HMRC(IHT) will offer relief if they are satisfied that it is applicable. If HMRC(IHT) require factual advice as to whether any of the property transferred, including any plant or machinery, is occupied or used for the purposes of the business they will ask the DV for it.
Extent of Relief
S.104 as amended by the Finance (No 2) Act 1992 specifies the reduction appropriate to the various categories of relevant business property (see para 11.15 below) as regards transfers made on or after 10 March 1992 as follows:-
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For businesses, controlling holdings of securities which are unquoted and any holdings of unquoted shares within s.105(1)(a) (b) or (bb) by 100%.
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For other relevant business property by 50%.
Transfers of farming businesses are eligible for relief on the same terms as other businesses to the extent that agricultural relief, which is given in priority, is not appropriate. See para 11.53 below.
Transfers of forestry businesses are eligible for business relief on the land and other non-timber assets. Relief is also available on the timber itself if tax is not deferred under s.125(2) (see para 11.54 below).
Normal business relief rules apply in respect of chargeable lifetime transfers where tax is payable immediately.
There are further conditions however in respect of tax or additional tax payable on deaths within 7 years of a potentially exempt transfer (PET) or an immediately chargeable transfer (these terms are explained in Section 4 para 4.1 et seq). Broadly these additional conditions require the property to remain relevant business property in the ownership of the original transferee at the date of death. If the transferee has disposed of the property however or if it no longer qualifies as relevant business property (see para 11.15 below) then business relief will not apply (s.113(A) inserted by para 21 Sch 19 Finance Act 1986).
Reserved
Relevant Business Property
The categories of “relevant business property” are set out in s.105(1) as amended by FA 1987, Finance (No 2) Act 1992 and Finance Act 1996 and comprise:
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Property consisting of a business or an interest in a business. (This may include all the assets such as land, buildings, plant or machinery of an unincorporated business conducted by a sole proprietor, partnership etc.)
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Securities of a company which are unquoted and which (either by themselves or together with other such shares or securities owned by the transferor) gave the transferor control of the company immediately before the transfer.
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Any unquoted shares in a company
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Unquoted shares in a company which do not fall within paragraph (b) or paragraph (bb) above.
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Shares in or securities of a company which are quoted and which (either by themselves or together with other such shares or securities owned by the transferor) gave the transferor control of the company immediately before the transfer.
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Any land, building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by the company of which the transferor then had control or by a partnership of which he then was a partner.
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Any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by the transferor and was settled property in which he was then beneficially entitled to an interest in possession.
“Business” includes a profession or vocation (s.103(3)). “Quoted” in this context means quoted on a recognised stock exchange.
It should be noted that in applying the use tests for isolating “excepted assets” from relevant business property there is an alternative test (ie required for future use in the business). See s.112(2)(b) and paras 11.27 and 11.28 below.
Cases under categories (a), (b) and (bb) with effect from 10 March 1992 receive 100% relief, other cases will be referred to DVs by SAV - see Section 16.
Exclusions from Relief
Subject to certain exceptions, relief is not available to businesses or shares in companies engaged wholly or mainly in dealing in securities, stocks or shares, land or buildings or in the making or holding of investments (s.105(3)).
A business not carried on for gain is excluded from relief (s.103(3)).
With certain exceptions relief is denied if relevant business property is subject to a contract for sale at the time of transfer (s.113). If aware of the existence of a binding contract the DV should notify HMRC(IHT) and return all the papers. If, nevertheless, the business property is still entitled to relief and the contract for sale includes other property, HMRC(IHT) will ask the DV to apportion the price in order to apply the relief.
Minimum Period of Ownership
Generally to qualify for relief a transferor must have owned the business for two years immediately before the transfer (s.106) or, if it replaced other relevant business property, the original and any replacement property must have been owned for periods totalling at least two years out of the five years immediately prior to the transfer (s.107). However for the unquoted shareholdings relief (s.105(1) the 2 year qualifying period does not include any period of ownership of subsequently replaced shares unless they can be identified with the original shareholding (eg. capital reorganisation, company amalgamation etc) (s.107(4)).
If the transferor acquired the business property on the death of a spouse or civil partner, it is treated as having been owned since the spouse or civil partner acquired it (s.108(b)).
The two year period of ownership condition may be set aside if an earlier transfer of value took place within two years and one of the transfers was made on death (s.109).
In cases where the property transferred has replaced other qualifying business property of lower value the relief may be restricted to the lower value of the former property. In these cases HMRC(IHT) will ask the DV for information and valuation advice relating to the former property (s.107(2)).
Excepted Assets
To prevent a transferor from obtaining relief by disguising private assets as business assets s.112 excludes from relief that part of the value of “relevant business property” which is attributable to “excepted assets”. However, the value of any excepted asset will still be included in the value transferred.
Except where paragraph 11.24 applies an asset, including any land, buildings, plant or machinery, belonging to a business (whether incorporated or unincorporated) is an “excepted asset” (s.112(2)) unless it was either:-
- used wholly or mainly for the purposes of the business throughout the whole of the two years before the transfer, or for the whole of the period since its acquisition by the business, if more recent; or
- required at the time of the transfer for future use for those purposes.
Relief is only available for assets comprising land, buildings, plant or machinery lent to a partnership or company by the transferor as a partner or controlling shareholder, (ie s.105(1)(d) property), if, in addition to the minimum period of ownership condition (see para 11.18 above), the assets have been used by the relevant concern throughout the two years preceding the transfer or, where one asset replaced another asset, if the assets together have been used by the concern for at least two years out of the preceding five. This is limited to the actual period of ownership where the minimum period is waived under s.112(3). See para 11.18 above.
An asset is also excepted if it was used wholly or mainly for the personal benefit of the transferor or a connected person (s.112(6)). This is aimed at excluding such assets as a penthouse flat or a mansion house, used occasionally for entertaining business clients.
Ascertainment of Excepted Assets
In order to eliminate the value of “excepted assets” from relief as relevant business property, but not from the transfer of value, a primary “wholly or mainly” relevant business use test is applied by s.112(2) to each individual asset of the relevant business property. For land and buildings, but not for other assets such as plant and machinery etc., there is a secondary “exclusive” relevant business use test under s.112(4), if the primary test is failed. See para 11.37 below.
HMRC(IHT) may seek the advice of the DV as to the use of specific assets such as a parcel of land, a building, a unit of plant or machinery at the time of the transfer and during any qualifying period. HMRC(IHT) will identify the particular asset concerned and will usually request advice as to its use when the case is referred for an opinion of value.
The DV will be responsible for deciding if the “wholly or mainly” use test is passed and for any asset (other than plant or machinery) which fails that test for deciding what part, if any, passes the “exclusive” use test. In borderline cases the benefit of any doubt should be given to the taxpayer.
If HMRC(IHT) have decided that any property is relevant business property and the DV is unable to determine if a use test is passed or is uncertain as to the extent of the asset to be tested he or she should seek advice of CEO (DVS).
If HMRC(IHT) have made no reference to any relevant business property see para 11.47 below.
In ascertaining the use of an asset at a particular time or over a period of time the DV should make use of available local taxation records and any past case history involving the asset. In giving advice the DV should have regard to the actual use of the asset over the relevant period of time. In cases referred by HMRC(IHT) as relevant business property the DV may also seek information from the parties or their representative.
It is important to remember when applying the use tests that the use must be for the purposes of the relevant business and not for any other business use and the asset must be reflected in the value of the relevant business property.
If HMRC(IHT), when requesting advice as to use, have specifically identified part of a single asset as relevant business property because it was required, at the time of the transfer, for future use for the purpose of the business (see para 11.27 above) the DV should unless otherwise instructed, apply the “wholly or mainly” use test to the remainder of the asset only. See para 11.34 below.
Apart from cases concerning categories (bb) and (c) relevant business property (see para 11.15 above), if it is reasonably apparent on inspection that part of a single building, such as a new extension, or part of a single parcel of land is being held or is about to be brought into use for the purposes of the business and HMRC(IHT) have not indicated this, the DV should apply the “wholly or mainly” use test to the remainder of the building or parcel of land, reporting to HMRC(IHT) by a memorandum setting out the facts.
For relevant business property within categories (bb) and (c) the primary “wholly or mainly” use test should be applied in respect of the whole asset including any unused portion.
In applying the “wholly or mainly” use test, any joint use of an asset or part of an asset should be regarded as use for the purposes of the business provided the business use is paramount.
In applying the “exclusive” use test to part of an asset HMRC(IHT) do not intend to take the point, for example that the domestic use, out of business hours, of a dentist’s waiting room or surgery within his house disbars such accommodation from being exclusively used for the business. Similarly HMRC(IHT) would not disbar from relief a garage, forming part of an asset, which was also used for domestic purposes.
The DV should follow these principles when deciding whether such joint uses pass either of the use tests.
As soon as it is clear to the DV that the parties will not agree the extent of the relevant business property or the exclusion of any “excepted asset” the DV should advise HMRC(IHT) of the circumstances, either in writing or by email, outlining the matters in dispute.
Primary wholly or mainly use test
Apart from the special circumstances referred to in para 11.31 above the primary wholly or mainly relevant business use test is applied individually to each separate asset comprising an identifiable single parcel of land, a separate building or a particular unit of plant or machinery. The asset will usually be identified by HMRC(IHT) but they may require the assistance of the DV in order to determine its extent.
Where the separate asset is only partly used for the purposes of the business it is considered that the ratio of value between the part so used and that which is not, would not be a determining factor but the ratio of floor area or cubic content would be relevant. Any changes to a non-business use or to a business other than that of the relevant business which have taken place during the qualifying period, are relevant in considering whether the separate asset is used mainly for the purposes of the business. It is suggested that if more than 60% of the space in a building or of a parcel of land is used for the purposes of the business it would satisfy the test of “mainly used”.
An example of an asset failing the “wholly or mainly” primary use test would be a doctor’s house with one room used as his surgery. In such a case, however, the secondary test of “exclusive” use of part of the asset for the purposes of the business would apply. See para 11.38 below.
By contrast a single property comprising a large shop with small flat over, occupied by the manager, would probably be regarded as “mainly” used for the purposes of the business with the result that the entire premises would be “relevant business property”.
For assets comprising units of plant or machinery, only the primary use test is applicable and in considering the question of “mainly” used the fact that plant and machinery lies idle between processes should not be regarded as a period of non-use for the purposes of the business. See para 11.41 below concerning the assistance of the Business Assets and Machinery team.
Exclusive use of Part of Land or Building for Purposes of the Business
Where a parcel of land or a single building fails to pass the “wholly or mainly” use test s.112(4) provides that if any part of that land or building is used exclusively for the purposes of the business then the part so used and the remainder shall be treated as separate assets. The value of the part exclusively used for the business shall (if it would otherwise be less) be taken as a “just” proportion of the whole.
In response to a request from HMRC(IHT) for advice in these cases the DV should report the higher of:
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the value of the exclusively used part as a separate asset; and
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the apportioned value of the exclusively used part (apportioning between that and the remainder according to the value which each part contributes to the value of the whole).
It should be noted that the term “exclusive use” implies actual use so that part of a building or a parcel of land kept vacant for future use by the business would not qualify although occasional short temporary periods of vacancy may be disregarded provided they arise in connection with the normal use for the purposes of the business, but see para 11.32 above.
If in doubt the DV should advise HMRC(IHT) of the facts ascertained and await instructions.
Valuations Involving Plant and Machinery
Where the value transferred includes a building which does not qualify as “relevant business property” but which contains plant and machinery which does, care must be taken in apportioning the value attributable to the “relevant business property” (the plant and machinery) in order to ensure that it is not disproportionate to the overall value of the building including its contents.
Specialist assistance is available to DVs in connection with the valuation and negotiation in respect of plant and machinery. See Section 26: para 26.38.
Inspections
If the DV is satisfied that, having regard to any likely increase in the IHT payable, the result would not justify the time and expense of an inspection (see Section 27 para 27.29), the property should not be inspected solely to ascertain if business relief may be involved.
If an inspection is made and it is found that any premises are only partly used for business purposes a note should be made of those parts used for the business and those which are not, so that, if HMRC(IHT) decide that business relief is applicable the DV will be able to make any apportionments necessary (see paras 11.25 and 11.35 above) without a further inspection, but see para 11.47 below regarding business premises with a diversity of buildings and uses.
Procedure on Reference of Cases
Where HMRC(IHT) are aware that relevant business property is involved they will indicate the category (see para 11.15 above) and the property concerned. If the use tests to be applied by the DV to those assets are other than at the date of transfer and for the two years preceding, HMRC(IHT) will specify the date and period.
Provided there is sufficient information to operate the use tests and so isolate any “excepted assets” when notifying the parties of the value transferred on VO 1101, the DV should enclose a covering memorandum stating how much of that value is attributable to relevant business property. Where the DV is unable to do this the papers should be returned to HMRC(IHT) with a covering memorandum setting out the information required.
If HMRC(IHT) make no reference to any relevant business property but, on inspection it appears that such property is involved (provided the business is not farming) the DV should inform the parties of the opinion of the value transferred on VO 1101 without making any reference to relevant business property. At the same time a memorandum should be sent to HMRC(IHT) stating that business relief may apply, apportion the valuation between relevant business property and excepted assets and give a brief description of any property that may not qualify for business relief, e.g. private garage, void building, let-offs or any other assets apparently failing to pass the use tests.
However, if the extent or use of business assets is in doubt or if such matters appear complex or the case involves a farming business for which no claim for agricultural relief has been made the DV should return the papers to HMRC(IHT) either before or after inspection with a covering memorandum setting out the facts and requesting advice. See para 11.45 above regarding inspections.
Agricultural relief cases will be dealt with as such and no action will be required regarding business relief unless HMRC(IHT) specifically request it.
Undivided Shares - Valuation and Reporting
Where an undivided share of relevant business property is transferred reference should be made to Section 18. If only part of the value of an undivided share is attributable to “relevant business property” the DV should report on Form VO 1110 (or by memorandum if appropriate):
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the value transferred;
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that part of the value of the property transferred (i.e. the undivided share) which is attributable to the “relevant business property”; and
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the value of the property transferred (i.e. the undivided share.
Reporting of Cases
Section 27, para 27.63 gives guidance on reporting cases where the value transferred relates to or includes relevant business property, but see para 11.33 above where the extent of the relevant business property or “excepted assets” is disputed.
Case Registration
Cases received from HMRC(IHT) will be registered in accordance with the normal procedure for IHT life or death cases, irrespective of whether business relief is applicable.
Avoidance of Double Relief
Where shares or securities which qualified for 100% business relief either as part of a control holding or under s.105(1)(bb) are subsequently revalued for relief under s.176 (see Section 12 para 12.30) at a lower value, then the 100% business relief is no longer applicable (s.105(2) and (2A)).
The revalued minority holding, or part of it, may qualify for 50% business relief for minority share holdings within s.105(1)(c) (s.104(1)(b)).
Where agricultural relief is granted by ss.115-124B in respect of part of the value transferred, then only the balance is available for business relief (s.114(1)). For example, if agricultural relief is granted on the agricultural value of a farm with hope value, business relief is restricted to the hope value and to any other assets of the farming business, including agricultural land not qualifying for agricultural relief, provided such assets qualify as relevant business property.
In agricultural relief cases where two transfers of value took place within two years of the relevant transfer and the earlier transfer was a partial gift only (a part purchase transaction) with the result that agricultural relief is restricted by s.121(3) to a proportion only of the agricultural value of the agricultural property, business relief is excluded both in respect of the proportion qualifying for agricultural relief and in respect of the remainder of the agricultural value.
For transfers of value (lifetime and on death) business relief may be available in respect of the land (including any hope value) and other non-timber assets of a forestry business as well as on the timber itself.
By s.126 tax may become due on the value of trees and underwood following a disposal where tax had been deferred under s.125 on a previous death. Business relief will be available on the value or net proceeds of such a disposal provided:
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the trees or underwood were an asset of an unincorporated forestry business and
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that had the election to defer tax not been made, the value of the trees or underwood would have been eligible for business relief (s.127(2)).
Interaction with CGT in Death Cases
The reduction in the value transferred on death for “relevant business property” is ignored in arriving at its deemed acquisition value for CGT purposes (s.274 TCGA 1992).