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Readers' Forum - Following Farmer

07 July 2005
Issue: 4015 / Categories:

Following Farmer

Following the Farmer case (Farmer & Giles (Farmer's Executors) v CIR [1999] SSCD 321), Capital Taxes Office seems to have accepted that where a company is 'wholly or mainly' engaged in business activities that are not prohibited by IHTA 1984, s 105(3) (i.e. dealing in prohibited assets or making or holding investments), then the whole of the company's shares can qualify for business property relief.

Following Farmer

Following the Farmer case (Farmer & Giles (Farmer's Executors) v CIR [1999] SSCD 321), Capital Taxes Office seems to have accepted that where a company is 'wholly or mainly' engaged in business activities that are not prohibited by IHTA 1984, s 105(3) (i.e. dealing in prohibited assets or making or holding investments), then the whole of the company's shares can qualify for business property relief. This is despite the element of value attributable to the activity of holding investments, provided that activity can be called a 'business'. In my experience they do this by simply accepting the claim and not formally admitting it.
I have a case where a life interest has terminated on the death of the life tenant and the settlement held shares in a company that for many years simply invested cash. Approximately 15 months before the death of the life tenant, the directors of the company spent more than half of the cash on acquiring a trade and it now carries on the trading activity. Do the shares qualify as business assets at the date of the death of the life tenant?
The HMRC's Inheritance Tax Manual (IHTM25303) provides examples of where the nature of the business has changed, but always by giving the example of trading activities. Can I be hopeful that a challenge will not be made? The trust is not large and the remainderman does not want a fight with the Capital Taxes Office. How should we proceed in completing Form IHT200?
Readers' views will be appreciated.
Query T16,638            — Activist.


It is worth mentioning that the case of Farmer was franked by the decision of higher authority (Court of Appeal) in CIR v George (Executors of Stedman, dec'd) [2004] STC 147. Thus, whereas Farmer provides various yardsticks by which a business may or may not be an investment business excluded from business property relief by IHTA 1984, s 105(3) — such as time spent, capital employed, profit and turnover — George emphasises the need to step back and consider the business 'in the round'.
George would therefore require a critical examination of the true nature of the business. The case of Brown's Executors v CIR [1996] STC (SCD) 277 may be helpful in this examination, even though it dealt with the reverse of Activist's situation (being concerned with whether the proceeds from the sale of a nightclub held on short-term deposit were intended for future non-investment activities). It was emphasised in the Brown case that the intentions of the directors of the company were important and whether the way the money was held facilitated those intentions. By analogy, if the circumstantial evidence suggests the company here has entered into its trading activities for the longer-term and has set up suitable infrastructure and support to maintain their well-being, there should be a strong case to support the contention that the company's business has changed and was intended to continue as changed.
Once the s 105(3) hurdle — which is all or nothing — is cleared, the excepted asset rules (IHTA 1984, s 112(2)) are not in point unless, exceptionally, any of the assets used in the company's trading business were previously held and used for its previous activity of cash investment (which seems unlikely). This is because it is sufficient for trading assets to have been used for the purposes of the trading business since acquisition by the company and not for two years prior to the chargeable transfer of the shares.
If Activist is satisfied that s 105(3) is not in point, a claim for relief should be entered on form IHT200 and the corresponding details given on form D14 in answer to question 4. If HMRC then check the nature of the company from submitted accounts, further questions no doubt will be asked but, if this happens, Activist will be able to provide supporting details.  

Issue: 4015 / Categories:
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