Companies investing in Life Assurance Bonds – Inheritance Tax (IHT) Business relief

Companies investing in Life Assurance Bonds – Inheritance Tax (IHT) Business relief

Business relief, or Business Property Relief (BPR) as is it often called, gives a substantial relief from tax.

It reduces the value transferred by either 100% or 50% depending on circumstances.

The legislation, Inheritance Tax Act 1984 (IHTA), is ‘designed’ to give relief on transfers of businesses (and in certain circumstances business assets) as opposed to transfers of investments.

There are three tests to be satisfied in the context of a transfer of shares in a company;

  • The company must carry on a business
  • That business must not fall within certain restrictions.  Business relief is not due where the business, or the business carried on by the company, consists wholly or mainly of;
    • dealing in securities, stocks and shares;
    • dealing in land or buildings, or
    • making or holding of investments.
    • The value of any ‘excepted assets’ is to be left out of account for the purposes of business relief. In order not to be ‘excepted’ an asset must pass one of two tests:
  • It must have been used wholly or mainly for the purposes of the business in question throughout the two years, or such lesser period as the transferor owned the asset (or a corresponding interest in the asset in the case of an interest in a business), immediately preceding the transfer of value.
  • Alternatively it must be required at the time of the transfer of value for future use for the purposes of the business in question

The purpose of the excepted asset rules is to exclude non-business (i.e. investment) assets from the scope of business relief.

The ‘future use’ test in (b) above was considered in Barclays Bank Trust Co Ltd v CIR SpC 158.

A lady died owning 50% of the shares in a company. Her husband owned the other 50%. The company’s trade was the sale of bathroom and kitchen fittings, mainly to ‘trade’ customers.

The company’s turnover at the time of the lady’s death was approximately £600,000. It held £450,000 in ‘cash’ invested for periods of up to 30 days. HM Revenue & Customers (HMRC) accepted that the company needed £150,000 but determined that £300,000 was an ‘excepted’ asset.

The Special Commissioner posed the question as follows, at para. 10 of his decision –

“Was the £300,000 cash held by the company required on 23 November 1990 for future use for the purposes of the business? This is a question of fact and on the evidence before me I cannot find that it was so required. I do not accept that ‘future’ means at any time in the future nor that ‘was required’ includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven years’ time for the purposes of the business. In my opinion and I so hold that ‘required’ implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose.”

Whether the excepted asset test is satisfied is a question of evidence in the circumstances of any particular case.

The following questions on cash holdings and BPR were sent to HMRC by accountancy bodies in late 2013.

  • Where a company holds an amount of cash which is in excess of the amount which it’normally holds’ and there is no evidence of any given project upon which the funds will be expended, then BP relief will be denied as the excess will be treated as an excepted asset.
  • Members are aware of the HMRC guidance in  [Inheritance Tax Manual and Shares Valuation Manual] IHTM25352, IHTM25342 and SVM111220 and this guidance has proved sufficient in demonstrating the position of HMRC. It clarifies that cash balances should be viewed in light of the business’s trading cycle and that businesses should keep evidence of discussions surrounding the intended use of cash balances.
  • However, in the light of the current economic climate and in order to weather the financial adversity faced by many businesses within the UK, it is widely recognised that businesses are retaining increased cash buffers in case of any further downturn in their trade. This is a widely accepted tactic in surviving a recession to ensure that businesses succeed and reverts to the cliché that ‘cash is king’.
  • In this regard, confirmation from HMRC that they are aware of this change in mind-set of business owners and company directors, and look favourably on surplus cash held in this regard, would be extremely useful to our members.

The HMRC response was:

  • We understand that due to the financial circumstances in which business find themselves, they may choose to hold more cash in case of a potential downturn in trade. We can also confirm that in recent times we have seen this on a more frequent basis where businesses hold cash in excess of what they would traditionally require.
  • However, our guidance remains the same, and unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset. Therefore the holding of funds as an ‘excess buffer’ to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset.
Three points should be made in the context of a company investment in  a life assurance bond:

  • Cash is as much an ‘excepted asset’ as a bond – so switching from cash to a bond (or vice versa) has no effect on availability of BPR
  • The availability of BPR is only ‘tested’ on a transfer including a transfer on death. Spouse exemption might be available. A bond could thus remain a suitable investment ‘home’ in medium to long term. The bond could be distributed, perhaps by way of dividend, before an IHT ‘event’ occurs.
  • Only the value of excepted assets is excluded from relief – the remaining value (assets) get BPR (assuming the conditions are satisfied)

There are strong investment arguments in favour of holding surplus cash within a life assurance bond ‘wrapper’ and, as always, careful planning can avoid any BPR issues.



Source: Prudential