Executors of MacArthur v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 09 July 2008 |
| Date | 09 July 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
J Gordon Reid QC, FCI.Arb
Philip Simpson, advocate, instructed by Gillespie MacAndrew, Solicitors, Edinburgh, for the Appellants
Roderick N Thomson, advocate, instructed by DS Wishart, HMRC solicitors, office, Edinburgh, for the Respondents
Inheritance tax - share valuation - convertible unsecured loan stock - family companies - whether option to take shares valid or in doubt - whether options prescribed - effect on valuation of conversion rights - valuation assumptions - percentage deduction for minority and majority shareholdings - Inheritance Tax Act 1984 Inheritance Tax Act 1984 section 4 section 160sss. 4, 160, and Inheritance Tax Act 1984 section 168 subsec-or-para 1168(1); Prescription and Limitation (Scotland) Act 1973, Sch. 2, para. 2(2)(b)
The special commissioners held that certain loans and related conversion rights or options were granted and were valid, subsisting and enforceable immediately prior to the deceased's death.
The deceased ran certain private limited family companies, including A, B and C, which were investment companies. When he died the deceased's estate included minority shareholdings in each of the companies. Prior to his death he had made loans to B and C in return for which those companies conferred on the deceased an option to convert that sum into £1 ordinary shares at par as a substitute for cash. The loans were repayable on demand but prior to his death the deceased had not made a demand for repayment or exercised any option to convert the loan into ordinary shares. Had the deceased chosen to exercise the options immediately before his death, he would have had a majority shareholding in B and C.
The Revenue issued notices of determination under Inheritance Tax Act 1984 section 221IHTA 1984, s. 221 to the executors of the deceased's estate which determined the price which the deceased's shares, including those shares he was entitled to acquire on exercise of his options, might reasonably be expected to fetch if sold in the open market immediately before his death at £81,950 in A, £338,768 in B and £294,939 in C. The estate was valued at £1,800,943.24, and the inheritance tax assessed at £660,377.29.
The executors appealed. They contended that there was no evidence of the terms of the options which must have been agreed orally. The options to convert the deceased's loans into ordinary shares had prescribed as at his death and had no value as they had effectively ceased to exist. In the alternative, assuming that the conversion rights or options were valid, the valuations set out in the notices of determination should, in any event, be discounted. The Revenue took the view that the evidence supported the existence and enforceability of the options neither of which had prescribed before the deceased's death.
Whether the notices included the proper valuation of the relevant part of the deceased's estate.
The special commissioner (J Gordon Reid QC) (dismissing the appeal) said that, on the evidence and the relevant law, there was no significant doubt that the loans and related conversion rights or options had been granted and were valid, subsisting and enforceable immediately prior to the deceased's death. The conversion rights or options had not prescribed by the date of the deceased's death and the loans and conversion rights were recorded in the books and records of B and C.
While it was true an informal method had been used to create what, in effect, was convertible unsecured loan stock, the basic terms of the contracts were clear enough. There was more than sufficient evidence in the form of writs of the debtor to prove the existence of the loans and conversion rights. The law was littered with cases where obligations had been recorded by informal means yet were held to be valid subsisting and enforceable; informal leases for more than one year and the sale of heritage provide classic illustrations of such informality and enforceability.
It was not necessary to imply a term that the options would be exercised within a reasonable time to give the contracts business efficacy. Nor was such a term an inherent part of the contract which enabled the creditor to take shares instead of the sum advanced. The right to take shares, i.e. to convert the loan into stock, was a contractually stipulated substitute for the right to demand repayment of the sums borrowed. It made no difference to the debtor how long the creditor waited before demanding repayment or exercising the option to take shares in lieu of repayment. It had no bearing on the debtor's ability to perform.
The unit of valuation included the right, at the deceased's option, to convert loans into ordinary shares, in effect a form of convertible loan stock and the options were an alternative to repayment in cash. The debtor company's obligations could be discharged, at the option of the creditor, by repayment or by the issue of shares. There was no fixed period within which the option to convert had to be exercised and no enforceable obligations on which prescription could operate prior to the deceased's death.
The contracts were governed by the Prescription and Limitation (Scotland) Act 1973. The right to convert arose from the contractually agreed options. Each option was inextricably linked with and part of the terms of the contract of loan or became part of the contract by subsequent variation of the mechanism by which the liability of the debtor company was to be discharged. The right (and correlative obligation) formed part of a single obligation to repay a loan as to which parties had agreed a particular mechanism, so that para. 2(2)(b) of Sch. 2 to the 1973 Act applied. As there was no written demand for repayment the right to convert had not prescribed as at the deceased's death.
The valuation of the shareholdings identified in the notices was carried out on the assumption that the conversion rights or options subsisted and were valid and enforceable, and that the conversion rights or options had been exercised and converted into shares. The unit of valuation was the shares in each company plus the relevant conversion rights or options which had to be regarded as valid, subsisting and enforceable. Therefore the options had to be given their full value according to the relevant principles of valuation, law and practice. In those circumstances, there was no room for discount for any alleged uncertainties or difficulties a prospective purchaser might face. In the present case, there were none since each option was assumed to have been exercised and the shares issued and the purchaser, where appropriate, assumed to control the company to a lesser or greater extent depending on the proportion of the shareholding assumed to have been acquired.
Taking into account the expert evidence, the executors had failed to show that the determination in each notice should be varied or quashed, and the determinations would be confirmed.
1. These are three appeals by the executors of the late Ian Campbell MacArthur (the "deceased") who died on 14th July 1994, against Notices of Determination dated 13th December 2006. The deceased was the senior partner of the firm of MacArthur & Co. Solicitors, Inverness. The issue is the proper valuation of certain majority and minority shareholdings of the deceased in three private family companies. The issue is complicated by the fact that the deceased made loans to two of these companies; depending upon the analysis of the arrangements entered into these loans may have, in effect, been of the broad nature of holdings of Convertible Unsecured Loan Stock. They were, in the main, referred to as "options" or conversion rights in the evidence. The nature, scope and enforceability of these options are in issue. The determination of that disputed issue has a significant bearing on the value of the deceased's estate for Inheritance Tax purposes.
2. The Appellants were represented by Philip Simpson, advocate, instructed by Messrs Gillespie MacAndrew, solicitors, Edinburgh. He led the evidence of Andrew Todd, a solicitor and partner of Dickson Minto, WS, Edinburgh, Ian Macdonald, solicitor, and partner in the firm of MacArthur & Co Inverness, Neil MacArthur the deceased's son, and Bruce Sutherland CA, CBE. Roderick N Thomson, advocate, appeared on behalf of the Respondents ("HMRC"), instructed by DS Wishart of their solicitors' office in Scotland. Mr Thomson led the evidence of Keith Eamer BA. Both parties produced statements of or reports by their witnesses. A bundle of productions was also lodged. The authenticity, and where appropriate, the transmission and receipt of the documents were not in dispute.
3. The hearing took place at Edinburgh on 15th, 16th, 17th, 28th and 29th April 2008. Both counsel produced an Outline Submission or Skeleton Argument. Mr Thomson produced a detailed written Closing Submission.
4. Notices of Determination were issued under Inheritance Tax Act 1984 section 221section 221 of the Inheritance Tax Act 1984 to each of the three executors. Each Notice determined as follows:
That-
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1 The estate transferred included, inter alia, the value of the following moveable estate:
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(i) Cape Wrath Hotel Company Limited
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(ii) 670 £1 Ordinary shares
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(iii) Chapman of Inverness Limited
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(a) 2375, £1 Ordinary shares
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(b) Loan of £4,900
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(c) Option to convert loan of £3,500 to £1 Ordinary shares at par
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(iv) New Inverness Laundry Company Limited
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(a) 991 £1 Ordinary shares
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(b) Loan of £8,000
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(c) Option to convert loan of £8,000 to £1 Ordinary shares at par.
2 The value of the Deceased's shareholding in Chapman of Inverness Limited and New Inverness Laundry Company Limited included the value of the additional 3500 £1 Ordinary shares and 8,000...
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