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The High Court allowed the Revenue's appeal in Commissioners of Inland Revenue v Mallender and others (executors of Drury-Lowe, deceased).
Land charged for the purposes of a bank guarantee obtained by a Lloyd's underwriter was claimed as a business asset for the purposes of business property relief on his death. The Court disallowed it, saying that only the guarantee was relevant, not the asset that supported it.
The High Court allowed the Revenue's appeal in Commissioners of Inland Revenue v Mallender and others (executors of Drury-Lowe, deceased).
Land charged for the purposes of a bank guarantee obtained by a Lloyd's underwriter was claimed as a business asset for the purposes of business property relief on his death. The Court disallowed it, saying that only the guarantee was relevant, not the asset that supported it.
Background
Captain Drury-Lowe deceased, a Lloyd's name, had provided a bank guarantee as part of his assets committed to Lloyd's. As a condition of the guarantee, the bank took a charge on a parcel of commercially let land (known as the Denby land), owned by the deceased.
The Revenue said that for the purposes of section 110, Inheritance Tax Act 1984, the net value of the deceased's assets used in his business as a Lloyd's underwriter did not include the land. The executors appealed.
The Special Commissioner allowed the appeal, saying that the land was instrumental in the deceased acquiring a bank guarantee allowing him to carry on as a Lloyd's underwriter. The Revenue appealed.
(Christopher Tidmarsh for the Revenue; Shan Warnock-Smith for the executors.)
High Court judgment
The Revenue argued that an asset used as a security for a guarantee was not relevant business property within the meaning of section 105(1)(a), Inheritance Tax Act 1984. This was confirmed by section 110(b) which says that 'net value' is the 'value of assets used in the business'. The land was not used in the business; it was the guarantee that was used, and whether or not that guarantee was supported by a charge on the land was irrelevant.
Mr Justice Jacob agreed with the Revenue. Although it was commercially necessary to charge the land to procure the guarantee, there was no specific link between the business and the land. The business was concerned only with a guarantee being place, not how it was obtained.
The judge said further that the bank would not normally give a guarantee of 100 per cent of the valuation of the land; the usual maximum loan or value ration would be in the region of 70 per cent. Thus if the executors were right, they would be getting relief on a land value that was greater than the guarantee. This was 'manifestly absurd'.
Counsel for the executors argued that in order to obtain the guarantee, the deceased had had to put up what he actually owned, and this was no different from providing securities as Lloyd's funds. The judge disagreed. Where shares or securities are put up as Lloyd's funds, Lloyd's considered their value; when a guarantee was put up, Lloyd's looked to that and not beyond it.
Decision for the Revenue
(Reported at [2001] STC 514.)
Commentary by Allison Plager
This decision does not have the practical implications which one might expect at first sight. The Revenue has confirmed to Lloyd's that the amount of the guarantee still qualifies for 100 per cent business property relief. What is not within that relief is the additional value of the assets backing the guarantee, over and above the actual amount of the guarantee itself.
Inheritance tax business property relief is one of the few remaining tax benefits which is not to be gained by membership of Lloyd's.
