Hardcastle and Another v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 09 October 2000 |
| Date | 09 October 2000 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr A N Brice.
Inheritance tax - Business property relief - Lloyd's underwriter - Net value of business - Money owing on accounts open at the date of death - Whether "liabilities incurred for the purposes of the business" -Inheritance Tax Act 1984 section 110 subsec-or-para (b)Inheritance Tax Act 1984, s. 110(b).
1. Mr Michael William Hardcastle and Mrs Ruth Margaret Hardcastle, as executors of Mr Jack Ronald Vernede deceased ("Mr Vernede"), appeal against a notice of determination dated 20 December 1999 in the following form:
The Commissioners of Inland Revenue have determined:
in relation to
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(a) the deemed disposal for the purposes of inheritance tax on the death on 30 March 1994 of Jack Ronald Vernede ("the deceased"),
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(b) his underwriting business as a name at Lloyd's ("the business"),
that in computing the value of the deceased's estate, having regard to the terms of Inheritance Tax Act 1984 section 5s. 5 of the Inheritance Tax Act 1984, and in ascertaining the value of any relevant business property, for the purposes of Inheritance Tax Act 1984 section 104s. 104of that Act, the past or future profits or losses of the business shall not per se be added to or subtracted from these values.
2. Chapter I of Pt. V (Inheritance Tax Act 1984 section 103ss. 103-114) of the Inheritance Tax Act 1984 ("the 1984 Act") contains provisions which give relief for business property.Inheritance Tax Act 1984 section 104Section 104 gives the relief by providing that, 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 by 100 per cent in the case of property falling within Inheritance Tax Act 1984 section 105 subsec-or-para (1)s. 105(1)(a). Section 105 defines relevant business property and the relevant parts of the section provide:
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105. Relevant business property
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105(1) Subject to the following provisions of this section … in this Chapter "relevant business property" means, in relation to any transfer of value,-
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(a) property consisting of a business or interest in a business…
3. Section 110 contains provisions about the valuation of a business and the relevant parts provide:
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110 Value of business
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For the purposes of this Chapter-
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(a) the value of a business or of an interest in a business shall be taken to be its net value;
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(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;
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(c) in ascertaining the net value of an interest in a business, no regard shall be had to assets or liabilities other than those by reference to which the net value of the entire business would fall to be ascertained.
7. An agreed bundle of documents was produced. This included a statement of agreed facts.
8. From the evidence before me I find the following facts.
9. At the date of his death on 30 March 1994 Mr Vernede was an underwriting member of Lloyd's of London and was a member of 11 syndicates. He had an estate protection plan policy in respect of his underwriting activities under which there was an excess of £251,900. The policy provided that the reinsurers would, if the policyholder died during the policy period, indemnify his estate against all losses arising on any account for which an underwriting result was not formally notified to the policy holder before the date of his death.
10. On 22 July 1994 the appellants signed the Inland Revenue account for inheritance tax ("the account"). This stated that the net value of Mr Vernede's interest in his business was £265,507.61. (That was the amount of the funds he held at Lloyd's.) The account also indicated that there were underwriting losses of £301,311.28 for years prior to the date of Mr Vernede's death. (These consisted mainly of the excess under the estate protection plan of £251,900 and also some deferred losses which had been announced prior to Mr Vernede's death but which had not been called for payment.) The account claimed business property relief for the amount of £265,507.61 and sought to treat the losses of £301,311.28 as a deduction from the rest of the estate.
11. Mr Vernede's will was proved by the appellants on 2 August 1994. The grant of probate certified that the net value of his estate in the UK amounted to £623,806.
12. It was agreed that Mr Vernede's underwriting activities constituted a business within the meaning of Inheritance Tax Act 1984 section 105 subsec-or-para (1)s. 105(1)(a) and that business property relief was available. It was also agreed that Mr Vernede's funds at Lloyd's, amounting to £265,507.61, were "assets used in the business" within the meaning of Inheritance Tax Act 1984 section 110 subsec-or-para (b)s. 110(b). It was further agreed that the dispute concerned only the amounts owed by Mr Vernede on accounts for which a result had not been notified before the date of death. I take that to mean the sum of £251,900 being the excess under the estate protection plan policy.
13. The appellants argued that, when computing the net value of Mr Vernede's business for the purposes of business property relief, the money owing on the open accounts was not "a liability incurred for the purposes of the business" within the meaning of Inheritance Tax Act 1984 section 110 subsec-or-para (b)s. 110(b) and so should not be deducted from the value of the assets used in the business but from the value of Mr Vernede's other estate. The Inland Revenue argued that the money owing on the open accounts was "a liability incurred for the purposes of the business" and so should be deducted from the value of the assets used in the business.
14. Thus, the issue for determination in the appeal was whether, in ascertaining the net value of the business, the money owing on the open accounts was "a liability incurred for the purposes of the business" within the meaning of Inheritance Tax Act 1984 section 110 subsec-or-para (b)s. 110(b).
15. I was asked to give a decision in principle leaving the amount of the figures to be determined at a later date.
16. For the appellants Mr Peacock first argued that trading profits were not assets of a business and trading losses were not liabilities. Profits and losses were very different conceptually from assets and liabilities and he cited Reed v Young TAX[1986] BTC 242 at p. 246. In the context of a Lloyd's name, the assets used in the business were the funds deposited at Lloyd's (Owen v Sassoon TAX(1951) 32 TC 101) and liabilities incurred for the purposes of the business would include any sums borrowed to fund the deposits at Lloyd's. The money owed by Mr Vernede on the open accounts constituted trading losses and not liabilities incurred for the purposes of the business.
17. Next, Mr Peacock argued that a trading contract was property for the purposes of Inheritance Tax Act 1984 section 5 subsec-or-para (1)s. 5(1) of the 1994 Act and, like all other property belonging to a deceased person, had to be valued for the purposes of inheritance tax as part of his estate. Such a trading contract could have either a positive or negative value but it did not constitute either a profit or a loss. If it had a positive value it was not "an asset used in the business" because it was the very business itself. For the same reason, if it had a negative value it was not a "liability incurred for the purposes of the business". In any event, inheritance tax was a tax on capital and not on revenue and the trading contracts were revenue items. Although Mr Vernede's contract with Lloyd's might be a capital asset, following Van den Berghs Ltd v Clark TAX(1935) 19 TC 390 the trading contracts were made in the course of the underwriting business as in Anglo Persian Oil Co Ltd v Dale TAX(1931) 16 TC 253. Mr Vernede was a member of 11 syndicates and would have entered into a number...
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Williams and Another (Executors of the Estate of Campbell Deceased)
...within the IHTA 1984, s. 105 definition of business property. The Appellants placed reliance on the decision of Hardcastle v IR Commrs (2000) Sp C 259. The Hardcastle decision rejected a “balance sheet” approach to defining assets and liabilities for inheritance tax purposes. Further argume......