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Shall we Dance?
It was widely thought that last week's Budget would include an announcement that measures would be taken to amend the IHT business property relief legislation following the decision in the Nelson Dance Family Settlement case ([2009] STC 802). In the event, no such announcement was forthcoming and, since there seems to be some misunderstanding about the full implications of the case, we thought we should set out our analysis.
Shortly before his death Mr Nelson Dance transferred a sizeable area of farmland and two cottages to a discretionary trust. For IHT purposes this was an immediately chargeable transfer. IHT agricultural property relief was available in respect of the agricultural value of the land but there was in this case also development value. The question was: was Business Property Relief ("BPR") - which does extend to development value - also available?
Conventional wisdom has been that it was not: it has generally been supposed that BPR is restricted to the transfer of a business or interest in a business, as distinct from a business asset. But the High Court's ground-breaking decision was to note that BPR is due where the "value transferred is attributable to the value of a business"; that the "value of a business" is by statute defined to be the net value of the assets used in it; and that therefore the value transferred on the transfer of any of those assets must inevitably be "attributable to the value of a business" such that BPR is due. Though the semantics are tortuous the logic is impeccable. The decision opens the door to relief in cases where it was not previously thought due, though any elation must be deferred pending clarification of whether HMRC intend to appeal.
So far so good: no IHT was due on the immediately chargeable lifetime transfer. But that is not the end of the matter, for Mr Dance sadly died a year or two after making the gift. IHTA 1984 s113A creates the fiction of a notional transfer by the donee if the donor dies within seven years of the transfer: for the relief to remain available, that notional transfer must itself benefit from BPR. Thus - since the property was not attributable to the value of any business carried on by the trustees - the notional transfer by the trustees when Mr Dance died would not have benefited from relief.
However, it gets even more complex. In situations like the Dance case, the tax charge on death is at a maximum of 20%. But, curiously, if the gift had been not an immediately chargeable transfer but a potentially exempt one, any charge on death would have been at up to 40%. This, combined with the 2006 changes to the IHT treatment of trusts, means that it may in some circumstances be better to transfer business property (including assets which are now, in the light of the Dance decision, to be treated as business property) to a trust rather than gifting them outright - an entirely counter-intuitive and unlooked-for effect of the 2006 changes.
Confused? To discuss matters commercial (or terpsichorean) please contact Terry Jordan on 020 8922 9360 or terry.jordan@bkltax.co.uk.
