Inheritance tax relief


The Special Commissioners' case of Executors of Rhoda Phillips v HMRC [2006] WTLR 1280 highlights the generous scope of inheritance tax (IHT) business property relief (BPR).



Most shares in 'trading' companies can qualify for BPR and thus obtain a 100% valuation relief against the impact of IHT. However, BPR is generally not available in relation to shares in 'investment' companies.



A number of previous decisions established clearly that property investment companies do not qualify for BPR, and until 1989, the company subject to scrutiny in the Phillips case &150; PP Investments - had been such a company. However, in that year the company had sold its properties and then made loans to other family companies, the majority of which were property investment companies.



At the date of her death in June 2001, Ms Phillips owned 245,000 PPI shares, but Revenue & Customs determined that her shares did not qualify for BPR. Ms Phillips' executors appealed and the Special Commissioner was called on to determine whether the business of PPI consisted 'wholly or mainly of... making or holding investments' per section 105 of the Inheritance Tax Act 1984. If it did, no BPR would be available, and if it did not then 100% BPR would apply.



In reaching her decision, the commissioner identified several points. The activity of money lending is not normally regarded as an investment; however, other forms of lending (namely, the acquisition of a bond or debenture) might be. She held that it was not possible to say that lending was always 'investment' nor that it never was.



For BPR purposes, it is important to look at the activity of the business at the date of death and not the activity undertaken by the business in the past. Thus, the fact that until 1989 the company had been a property investment business was not relevant.



The fact that loans were made without taking any security did not mean that they were necessarily to be treated as investments and, likewise, the fact that the loans were mainly used to make investments by the companies to which they were made, also did not necessarily make the loans themselves investments. Indeed, it was found that the fact that PPI was not entitled to any profit generated from the investments made by the companies to which the loans were made, was consistent with the loans not being investments.



The commissioner ultimately held that at the date of Ms Phillips death, the business of PPI did not consist wholly or mainly of making or holding investments, and that therefore 100% BPR was available in relation to the shares.



From one perspective, the decision is strange because if Ms Phillips had made loans to the other companies personally, those loans would not have attracted BPR on her death, and yet owning shares in the company that made the loans gave Mrs Phillips 100% relief. On the other hand, the decision is not so strange. The legislation is clear that unless it can be demonstrated that the business of a company is wholly or mainly one of investment, the shares will attract relief. The commissioner determined that the business here was not one of investment - because she did not believe that making loans necessarily equated to an investment activity - and therefore the relief was due.



It remains to be seen whether Revenue & Customs will appeal this decision.



'Training' expenses



Two recent Special Commissioners' cases highlight the difficulties in claiming a tax deduction against training expenses.



In Consultant Psychiatrist v Revenue and Customs Commissioners [2006] STC (SCG), an employed psychiatrist's appeal for her professional training expenses to be allowed as a deduction against her employment income was dismissed.



Her employment contract stated that an essential qualification for her job was to be registered as a medical practitioner with membership or fellowship of the Royal College of Psychiatrists, and that personal expenditure on training was 'desirable'. To gain further training, the appellant studied at an institution accredited by the British Psychoanalytic Council, which would mean that she would be on their register of practitioners.



It was held that an expense is only allowed as a deduction against income if the employee is obliged to pay it as a holder of the employment, and the amount is incurred 'wholly, exclusively and necessarily in the performance of the duties of the employment'.



Here, a certain amount of continuing professional development was required for the appellant to retain membership of the college; however, the further training that the appellant paid for was not specifically required for her to do her job - it merely enabled her to do her job better. The expense incurred for the training was therefore not deductible.



This second case of Dass v Special Commissioner and others [2006] All ER (D) 152 (Oct) involved a self-employed tutor who was also an adviser in relation to the bringing of appeals before various tribunals. The fees he incurred for a two-year law course were held not to be allowable expenses in calculating his assessable profits; however, this time not because they were not incurred 'wholly and exclusively for the purposes of his trade', but because the cost of the course was held to be capital in nature.



The course was not a 'refresher' course to 'hone' the taxpayer's existing expertise, but was undertaken to equip him with a qualification that would enable him to enter into an entirely new practice area.



Both cases highlight the difficulties in obtaining a tax deduction for training expenditure. In the former case, had the expense been incurred by the employer a tax deduction would have been available and no benefit in kind would have arisen on the employee. Whenever training is required, consideration should be given to who incurs the expenditure. In the case of a self-employed individual, the test for deductibility is broader.



By Ian Maston, solicitor, Chiltern plc, London