Spc00682

INHERITANCE TAX – business property relief – whether necessary that a business is transferred rather than business assets – no – appeal allowed

THE SPECIAL COMMISSIONERS

	TRUSTEES OF THE NELSON DANCE FAMILY SETTLEMENT	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in London on 30 April 2008

William Massey QC, counsel, instructed by Payne Hicks Beach,  for the Appellants

Nicholas Caddick, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	The Trustees of the Nelson Dance Family Settlement appeal against a Notice of Determination of 23 April 2007 that: 
“In relation to the transfer of East Anton Farm, East Anton, Andover, Hampshire and part of Finkley Down and Finkley Manor Farms, Andover, Hampshire on 26 November 2002 to the trustees of the Nelson Dance Family Settlement by Nelson Ernest Victor Dance
That having regard to the provisions of section 105 Inheritance Tax Act 1984, none of the value transferred was attributable to the value of relevant business property.”
2.	This is a decision on a preliminary issue, namely 
“Whether for business property relief to be available under s.104 Inheritance Tax Act 1984 (‘IHTA’) there has to be: -
 (a) As the Appellant asserts, a transfer of value which has resulted in a reduction in the value of ‘relevant business property’ (as defined by s.105 IHTA) in the transferor's estate, regardless of whether an actual transfer of the ‘relevant business property’ takes place; or
 (b) As the Respondent asserts, a transfer of value that is a transfer of property that meets the definition of ‘relevant business property’ contained in s.105 IHTA.”
The Appellants were represented by Mr William Massey QC, and the Respondents (“the Revenue”) by Mr Nicholas Caddick.
3.	The issue arises because although the transfer of value in issue qualifies for agricultural relief that relief is limited to the agricultural value of the land.  Here the land has development value and so the Appellants claim business relief for the excess value.
4.	The following facts are agreed or assumed for the purposes only of the determination of the Preliminary Issue, and without prejudice to each party’s right in any further proceedings before the Special Commissioner to make submissions of fact and to lead evidence contrary to the facts agreed or assumed, and in particular to the Appellants’ right to submit that Mr Dance transferred a business or interest in a business (contrary to assumed fact (9) below).
(1)	Nelson Dance (“Mr Dance”) made a transfer of value, as defined in s3 IHTA (“the Transfer of Value”) on a date as yet unconfirmed in late 2002 or early 2003 (“the Transfer Date”).
(2)	Immediately prior to the making of the Transfer of Value, Mr Dance owned and carried on the business of farming as a sole trader (“the Business”). 
(3)	(i) 	The Business did not consist wholly or mainly of one or more of the following, that is to say dealing in securities, stocks or shares, land or buildings or making or holding investments;
	(ii)	Mr. Dance owned the Business throughout the two years immediately preceding the Transfer of Value.
	(iii)	The Business was not subject to a binding contract for its sale at the time of the Transfer of Value.
(4)	The assets used in the Business included land and buildings (“the Land and Buildings”), namely some 1,735 acres of agricultural land near Andover, Hampshire, consisting of Upper and Middle Wyke, Finkley Manor Farm and East Anton Farm, Icknield Way plus two cottages Nos 1 and 2 East Anton Farm Cottages. 
(5)	Prior to the Transfer of Value Mr Dance executed a settlement (the Nelson Dance Family Settlement) upon discretionary trusts such that the property which came to be comprised in it would be “relevant property” as defined in s58 IHTA 1984. 
(6)	On the Transfer Date, Mr Dance executed two declarations of trust (“the Declarations of Trust”), by virtue of which East Anton Farm comprising approximately 141 acres and the two cottages Nos 1 and 2 East Anton Farm Cottages, and part of Finkley Manor Farm comprising 218 acres, became held upon the trusts of the Settlement.  
(7)	The Declarations of Trust gave rise to the Transfer of Value. 
(8)	The land referred to at Paragraph (6) above qualified as agricultural property for the purposes of s.116 IHTA, was occupied by Mr. Dance for the purposes of agriculture throughout the period of two years ending with the date of the Transfer of Value, and was not subject to a binding contract for sale at the time of the Transfer of Value.
(9)	 Upon the Transfer of Value Mr Dance did not transfer a business or an interest in a business to the Trustees. 
(10)	Mr Dance died on 1 April 2004.
5.	Section 104(1) of the Inheritance Tax Act 1984 provides:
“(1) Where the whole or part of the value transferred by a transfer of value is attributable to the value of any relevant business property, the whole or that part of the value transferred shall be treated as reduced—
(a)     in the case of property falling within section 105(1)(a)…by 100 per cent…
But subject to the following provisions of this Chapter.”
Section 105(1)(a) reads “property consisting of a business or interest in a business.”  The value of a business is defined in s 110:
“For the purposes of this Chapter—
(a) the value of a business or of an interest in a business shall be taken to be its net value;
(b) the net value of a business is the value of the assets used in the business (including goodwill) reduced by the aggregate amount of any liabilities incurred for the purposes of the business;…”
6.	Each party made a statement of case followed by sequential skeleton arguments so that helpfully each had commented on the other’s arguments before the hearing.
7.	Mr Massey, for the Appellants, contends essentially that Mr Dance’s estate included relevant business property (the Business), that by reason of the Transfer of Value the whole of the value transferred (the amount by which the value of his estate was less than it would be but for the disposition, see s 3(1)) was attributable to the value of the relevant business property (being the net value of the Business, see s 110); accordingly the whole of the value transferred is treated as reduced in the case of [property consisting of a business or an interest in a business, see s 105(1)(a)] by 100%.  The policy of the relief is not to encourage transfers of businesses but to encourage the carrying on of business, and so there is no policy reason to restrict the relief to gifts of businesses.  The relief operates on death even if the business then ceases.
8.	Mr Caddick, for the Revenue, contends essentially that the reference to the value of the relevant business property (not the whole or part of the value transferred, as is referred to twice in the opening words of s 104), implies that the transfer must be of a business (including a part of a business capable of being a separate business), but not merely business assets.  It is a necessary part of his argument that the reference in s 104 to value transferred does not mean an amount as it does in s 3, but the nature of the property.  The policy of the relief is both to encourage business and the transfer of business, and so the policy requires restricting the relief to transfers of businesses.
9.	Each of them relies on other sections of the Act to support their interpretation, including the following:
(1)	Mr Caddick relies on the words I have italicised below in s 105(1):
“…relevant business property means, in relation to any transfer of value,--
(a) property consisting of a business or interest in a business…
as indicating that there must be a transfer of the relevant property.  Mr Massey replies that the italicised words are necessary to explain the references to the transferor in paras (b), (cc), (d) and (e).  He also points out that the italicised words are a transfer of value not of property.  Mr Caddick replies that the words qualify the parts which do not refer to the transferor.
(2)	Mr Caddick relies on s 113A:
“(3) The conditions referred to in subsections (1) and (2) above are—
(a)  that the original property was owned by the transferee throughout the period beginning with the date of the chargeable transfer and ending with the death of the transferor; and
(b)  except to the extent that the original property consists of shares or securities to which subsection (3A) below applies that, in relation to a notional transfer of value made by the transferee immediately before the death, the original property would (apart from section 106 above) be relevant business property.
…
(8) In this section—
…
“the transferee” means the person whose property the original property became on that chargeable transfer….”
He points to the reference to the transferee as implying that there must be a transfer of the business.  Mr Massey contends that this section was added in the Finance Act 1986 and cannot be used to construe the earlier legislation unless there is an ambiguity, meaning two equally tenable constructions, see Oliver LJ in Finch v IRC [1985] 1 Ch 1, 15 (also reported as Fetherstonaugh v IRC [1984] STC 261):
“Reliance was placed on the decision of the House of Lords in Kirkness v. John Hudson & Co. Ltd. [1955] A.C. 696 and, particularly, on the speech of Viscount Simonds in that case, for the proposition that, where earlier legislation is ambiguous, recourse may be had to subsequent legislation as an aid to its construction. Now undoubtedly that case is authority for the proposition, but it is essential for its application that there is first established an ambiguity in the earlier legislation. It is clear from Viscount Simonds's speech, and from that of Lord Reid, that ‘ambiguity’ in this context does not mean merely that different minds may come to different conclusions as to the meaning (see pp. 711, 713 and 735). If subsequent legislation is to be invoked, the earlier provision must be such that, to use Lord Buckmaster's phrases in Ormond Investment Co. v. Betts [1928] A.C. 143, 154, 156, it is ‘open to two perfectly clear and plain constructions’ or ‘fairly and equally open to divers meanings’ (emphasis supplied). The same notion is to be found in the Ormond case in the speeches of Viscount Sumner and Lord Atkinson. Viscount Sumner at p. 159 expressed reference to subsequent legislation as permissible where there is no reason, on the face of the prior Act, why one construction should be more right than another, and Lord Atkinson at p. 164 expressed the principle as applying where the Act was ‘readily’ capable of more than one interpretation.
It is, as it seems to me, clear from this that it is not enough to show simply that there are two arguable constructions. One has to go further and show that they are both equally tenable, and that there are no indications in the Act under construction favouring one rather than the other.” 
And see also O’Connor LJ at 18G.  This passage was recently approved in Cadbury Schweppes plc v Williams [2007] STC 106 at [33], [42] and [64].  Mr Caddick points to each party putting forward different constructions as demonstrating the existence of an ambiguity, to which Mr Massey replies that that does not make them equally tenable.  
(3)	Mr Caddick also contended that if I found an ambiguity that would under Pepper v Hart also entitle him to refer to the following passages in Hansard:
“It will substantially lighten the burden on transfer of businesses….
[In relation to the increase of the annual exemption to £2,000]  While the relief will be of general application, it will be particularly helpful to the small business man transferring his business over a period to his successors.” (Budget statement 6 April 1976 col 265-6)
He points to the latter passage as being unnecessary if the Appellant’s contention were right.  Mr Massey replies that the first passage does not deal with the point in issue here, and that the annual exemption point was relevant to the value in excess of the then 30% business relief.
(4)	Mr Caddick relies on s 113 headed Contracts for sale:
“Where any property would be relevant business property in relation to a transfer of value but a binding contract for its sale has been entered into at the time of the transfer, it is not relevant business property in relation to the transfer unless—
(a)  the property is a business or interest in a business and the sale is to a company which is to carry on the business and is made in consideration wholly or mainly of shares in or securities of that company, or
(b)  the property is shares in or securities of a company and the sale is made for the purpose of reconstruction or amalgamation.”
Mr Massey replies that if there had been a contract for sale of the whole business the business would cease to be relevant business property but that says nothing about the point in issue.
(5)	Mr Caddick relies on the contrast between the minimum ownership periods for the two reliefs, with s 117 referring to any agricultural property (the italics below are mine), and not in relation to business relief in s 106
“117 Minimum period of occupation or ownership
Subject to the following provisions of this Chapter, section 116 above does not apply to any agricultural property unless—
(a)     it was occupied by the transferor for the purposes of agriculture throughout the period of two years ending with the date of the transfer, or
(b)     it was owned by him throughout the period of seven years ending with that date and was throughout that period occupied (by him or another) for the purposes of agriculture.”
“106 Minimum period of ownership
Property is not relevant business property in relation to a transfer of value unless it was owned by the transferor throughout the two years immediately preceding the transfer.”
Mr Massey replies that the grammatical construction of the two sections is different, and that for business relief one has to own the business for two years, not the particular business asset.
(6)	Mr Massey relies on agricultural relief applying to the transfer of individual assets, as in this case.  Mr Caddick points to the different definitions of relevant business property as “property consisting of a business or interest in a business” in s 105(1)(a), and of agricultural property in s 115:
“(2) In this Chapter “agricultural property” means agricultural land or pasture and includes woodland and any building used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them, as are of a character appropriate to the property.”
Mr Massey also points out that no actual transfer is necessary for agricultural relief so that the failure of a tenant to serve a counter-notice to a landlord’s notice to quit would qualify (and the same for a business tenancy in relation to business relief).  Mr Caddick replies that that is a deemed disposition that would only be a transfer of value if done with gratuitous intent.
(7)	Mr Massey relies on the contrast with exemptions restricted to the identity of the transferee, including the spouse exemption in s 18 (including not only property that becomes comprised in the spouse’s estate, but also where this is not the case, to the extent to which the estate is increased), gifts in consideration of marriage in s 22, gifts to charities in s 23, gifts to political parties in s 24, gifts for national purposes in s 25, maintenance funds for historic buildings in s 27, and employee trusts in s 28.  There is also the small gifts exemption relating to outright gifts to any one person in s 20.  On the other hand, the annual exemption in s 19 is not restricted to gifts to a particular person and could apply to a failure to exercise a right (s 3(3)).  Neither business relief nor agricultural relief contains any requirement about the business or agricultural property being transferred to a transferee.  Mr Caddick replies that some of these cases (ss 18, 20, 22, 23, 24, 24A, 25, 27 and 28) are those where the identity of the transferee is the basis for the exemption, whereas in others (ss.19, 21, 30, 104 and 116) the identity is of no importance and so they do not need to refer to the transferee.  This does not mean that there is no need for there to be a transfer of the relevant property.  Inheritance tax is always concerned with transfers, including deemed transfers, for example the omission to exercise a right (a deemed disposition under s 3(3)) or on death (a deemed transfer of value under s 4). 
(8)	Mr Massey points out that for other items of relevant business property it is not necessary to transfer the whole.  For example, the relief applies to the transfer of 2% out of a 51% shareholding.  Mr Caddick replies that the definition of relevant business property in respect of shares is differently worded “any unquoted shares in a company,” and if the Appellant’s interpretation were correct the word any would be otiose.  Mr Massey replies that the wording replaced reliefs which varied from 100% to 50% depending on whether there was control, 25% of the votes, or less than that.  The current provision makes no such distinction and accordingly applies to any unquoted shares.
(9)	Mr Caddick points to Mr Massey’s interpretation leading to a result that cannot have been intended, that a gift of cash from the accumulated profits of the business would qualify for business relief.  Mr Massey replies that this would require both that the cash was one of the assets used in the business immediately before the transfer, and also that it was not an excepted asset, see s 112(2), which it would be if it was neither used wholly or mainly for the purposes of the business throughout the last two years, nor required for future use in the business.  Mr Caddick replies that the cash might have been used throughout the previous two years but not be required for future use, in which case it would not be an excepted asset.  Mr Massey agrees that it is a question of fact.
10.	Mr Caddick points to the textbook writers all supporting his argument.  McCutcheon (4th edition para 14-19) says “It is important to note that the individual assets of a business are not within this category; therefore it is not possible to secure relief under this head where individual assets of a business are transferred.”  Dymond’s Capital Taxes (para 24.710) says “It does not give relief to individual business assets.”  Foster’s Inheritance Tax (G1.11) says “Business means the whole of a business.  A transfer of a factory, for example, or any other individual asset used in a business will not qualify for business relief in this category, not will the transfer of all the assets of a business if the business itself is not transferred; there must be a transfer of the whole undertaking as such, or a transfer of an undivided share of the entire undertaking.”  All of these refer to the capital gains tax retirement relief cases such as McGregor v Adcock [1977] STC 206 either as authority or as being similar.  Mr Massey points out that the conditions for that relief were quite different: “If an individual…disposes by way of sale or gift of the whole or part of a business….”
Reasons for the decision
11.	I consider that the structure of inheritance tax is important to understanding whether value transferred can mean something different in s 104 from s 3.  The starting point is a disposition that reduces the value of a person’s estate:
“3 Transfers of value
(1) Subject to the following provisions of this Part of this Act, a transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer.”
But no account is taken of the value of excluded property ceasing to form part of a person’s estate as a result of a disposition, s 3(2).  There is an example of something deemed to be a disposition (the omission to exercise a right in s 3(3)), and conversely there are dispositions (which would include a deemed disposition) that are not transfers of value, as in s 10 (dispositions not intended to confer gratuitous benefit), s 11 (dispositions for maintenance of family), s 12 (dispositions allowable for income tax or conferring retirement benefits), s 13 (dispositions by close companies for benefit of employees), s 14 (waiver of remuneration), s 15 waiver of dividends), s 16 (grant of tenancies of agricultural property), s 17 (changes in distribution of deceased’s estate, etc).
12.	In addition to actual transfers of value resulting from a disposition there are deemed transfers of value, such as the transfer on death in s 4
“4 Transfers on death
(1) On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death.”
13.	Some transfers of value are exempt, such as transfers between spouses (s 18), annual exemption (s 19), small gifts (s 20), normal expenditure out of income (s 21), gifts in consideration of marriage (s 22), gifts to charities (s 23), gifts to political parties (s 24), gifts to housing associations (s 24A), gifts for national purposes etc (s 25), maintenance funds for historic buildings (s 27), and employee trusts (s 28).  For most of these the nature of the recipient is important and they follow this pattern:
“18(1)  A transfer of value is an exempt transfer to the extent that the value transferred is attributable to property which becomes comprised in the estate of the transferor's spouse…” 
14.	Transfers of value that are not exempt are chargeable transfers on which the tax is charged:
“1 Charge on transfers
Capital transfer tax shall be charged on the value transferred by a chargeable transfer.”
15.	The reliefs for business property and agricultural property operate by reducing the value of the value transferred: see paragraph 5 above for business relief, and s 116 for agricultural relief:
“116 The relief
(1) Where the whole or part of the value transferred by a transfer of value is attributable to the agricultural value of agricultural property, the whole or that part of the value transferred shall be treated as reduced by the appropriate percentage, but subject to the following provisions of this Chapter.”
16.	All these form part of an overall scheme.  Everything turns on the loss in value to the donor’s estate, rather than what is given or how the loss to the estate arises, except where the identity of the recipient is crucial to a particular exemption.  I regard it unthinkable that value transferred could mean different things in s 3 and s 104, as Mr Caddick contends.  
17.	I set out again s 104:
“(1) Where the whole or part of the value transferred by a transfer of value is attributable to the value of any relevant business property, the whole or that part of the value transferred shall be treated as reduced—
(a)     in the case of property falling within section 105(1)(a)…by 100 per cent…
If one combines this with the particular item of relevant business property with which we are concerned, business in s 105(1)(a) (and leave aside an interest in a business), and also the valuation provision for a business in s 110, this becomes:
“(1) Where the whole or part of the value transferred by a transfer of value is attributable to the [net value of a business (ie the value of the assets used in the business (including goodwill) reduced by the aggregate amount of any liabilities incurred for the purposes of the business)], the whole or that part of the value transferred shall be treated as reduced—
(a)     in the case of property [consisting of a business]… by 100 per cent…”
This may be compared with, for example, the spouse exemption in s 18:
“A transfer of value is an exempt transfer to the extent that the value transferred is attributable to property which becomes comprised in the estate of the transferor's spouse…” 
In the case of business relief, the value transferred must be attributable to the value of assets; in the spouse exemption, the value transferred must be attributable to property (rather than the value of the property) which becomes comprised in the spouse’s estate.  The former requires attribution of the value transferred to a value, and the latter to particular property.  Business relief is therefore much more concerned with values than property.  Although the attribution is to the net value of the business as a whole, this does not imply that the value transferred must relate to the whole business.  Indeed the exclusion for value attributed to excepted assets in s 112 shows that the value transferred may need to be attributed to the value of particular business assets (although that would equally be the case if the relief were restricted to transfers of the whole business).  Presumably the attribution to the net value of the business is to put a ceiling on the relief to prevent a transferor giving away the total assets of the business, claiming business relief for them, while retaining the liabilities and paying them out of other assets (although that seems to be possible for agricultural relief as the relief is given in terms of attribution to the agricultural value of agricultural property).  I do not see any ambiguity, as understood in Finch, in s 104, and so I do not need to consider Mr Caddick’s arguments on s 113A or Hansard.  I have considered the various other references relied on by Mr Caddick and Mr Massey’s answers to them recorded in paragraph 9 above but I am not persuaded that they do anything to require me not to give effect to the plain meaning of s 104.  I am conscious that I am differing from the three textbooks cited but I am unable to see how they reach their conclusion that a whole business must be transferred for the relief to apply.
18.	Applying that interpretation of s 104 to the facts, all that is required is that the value transferred by the transfer of value is attributable to the net value of the business.  Are the assets comprised in the Declarations of Trust attributable to the net value of the Business, or to the value of some other assets?  Clearly they are attributable to the net value of the Business as they are a component part of the assets used in the business contributing to that net value.  Business relief therefore applies to reduce the value transferred by 100%.
19.	Accordingly I decide the preliminary issue in favour of the Appellants.  This automatically determines the appeal, which I allow and quash the determination I the Notice of Determination.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 8 May 2008

SC 3208/07

Authority referred to in argument and not referred to in the decision:
Barclays Bank Trust Co Ltd v IRC [1998] STC (SCD) 125