Barker Gotelee

Following the case of Nelson Dance v HMRC, business owners now have the chance to make tax free lifetime gifts of business assets.  However, it is thought as a consequence of the case, legislation will shortly be introduced to stop business owners taking advantage of this opportunity.

Mr Dance owned and carried on a farming business as a sole trader.  Part of the assets of the farming business included 1,735 acres of land and buildings near Andover in Hampshire.

Mr Dance made a gift of part of the land, but died a year or so later and as a result, inheritance tax became payable on the gift.  Although the land was agricultural, and therefore eligible for agricultural property relief (APR), this relief is limited only to the agricultural value of the land.  In this particular case, the land had significant development potential but APR would not be available on any development value.

Business Property Relief (BPR) was claimed in respect of the value transferred which was over and above the agricultural value of the land.  However, H M Revenue & Customs argued that the value transferred did not amount to ‘relevant business property’ and therefore was not eligible for relief.

For many years it has been thought that, in relation to sole traders, BPR was only available on a gift of a “business or interest in a business”, not in relation to gifts of assets used in a business.  However, as a result of the Nelson Dance case, which examined the question of what constituted “relevant business property”, it is established that BPR is also now available for gifts of assets which were, immediately before the gift, used in the donor’s business.

The Court accepted that the general principle, which governs the law in this area, is to focus on the “loss to the donor”.  This means that inheritance tax is paid on the reduction in value of the donor’s estate and not on the value of the gift which is received.  If the gift is a business asset, BPR is available to set against tax which arises as a result of the reduction in value of the donor’s business.  It does not matter that the assets will not be used in the business in the future.

As a result of this case, there is currently the opportunity to pass down to the next generation, free from inheritance tax, assets which are no longer needed by the business.  These gifts could be made outright, or put into trust if necessary.  Putting business assets into trust would enable business owners to retain control of who receives what assets and when.

Suzanne Whyman

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