Inheritance Tax and Investment Companies

Businesses whose activities consist wholly or mainly at making investments may not qualify for Business Property Relief under Section 105 (3) of the Inheritance Tax Act 1984. It has always been an area of great difficulty as young businesses may comprise trading assets and working with substantial debt whereas a mature business may hold the undistributed profits earned over many years which have been held in safe assets such as property.

The problem at its extremes results in either relief being denied on the entire company because it is no longer trading and is a pure investment company and the directors recognise the claim for relief would fail.

At the other end of the spectrum trading companies will have little difficulty in establishing a claim for 100% relief.

The problem arises where the accounts of the trading company show some trading activity and the receipt of rental income or as in the recent case determined by the Special Commissioners in relation to a development company was because of its level of rental income received as opposed to other trading profits meant that the company as a whole consisted of a business of holding investments and therefore did not qualify for relief on the death of the major shareholder. The evidence reveals that the company’s business had always been and now remained that of a development trade marshalling development sites with a view to the sale of the finished property development. The company would purchase suitable properties and when the time was right redevelop them and then sell the completed development. It was contended on behalf of the taxpayer that the company’s land which was let and produced a rental income was its stock and that none of the land was held as an investment. The Revenue contended that because there was a vastly disproportionate amount of rent received as opposed to other trading income that the company’s business had to be regarded as mainly one of making and holding investments.

The Special Commissioner found in favour of the taxpayer on the basis that the company had property development in the blood and therefore was not a business which had changed from that of development to investment. The retention of properties for redevelopment with the result that the company received significant amounts by way of rental income did not change the nature of the company from development to investment simply because some of the rental income had been drawn over a number of years. The company argued that they would only redevelop some sites when the time was right and in the meantime would hold the land as stock drawing the rent until redevelopment was possible. The Special Commissioner decided that relief should be granted and this will be of significant interest to many directors of companies which hold some land from which an income is drawn but have other trading activities.

As always much will depend on the facts of each case.