SVM111120 | IHT Business Property Relief: Property subject to a contract for sale

Under section 113 IHTA 1984 shares in or securities of a company which are subject to a binding contract for sale are not relevant business property. The exception is where the shares or securities are sold for the purposes of reconstruction or amalgamation.

“Buy and sell” arrangements

Shareholder directors of companies may enter into agreements between themselves to the effect that

• when one of them dies before retirement

• the surviving directors may purchase the shares of the one who has died.

The funds for the purchase may be provided by appropriate life assurance policies.

Only most exceptionally does such an agreement constitute a binding contract for sale within section 113 IHTA 1984. For the agreement to come within section 113 IHTA 1984 it has to provide

• for the shares of the deceased shareholder to pass to their personal representatives

• that the personal representatives are required to sell the shares to the surviving shareholders

• who are in terms obliged to buy them.

When these requirements are satisfied, the agreement is called a “buy and sell” agreement and it prevents the interest or shares concerned qualifying for business relief (BR).

Disqualification does not however apply to shares or securities in companies whose articles require the personal representatives of a deceased shareholder to offer their shares for sale to the company, other shareholders or directors, provided there is no obligation on the offerees to buy. If however, exceptionally, one side is bound to offer the shares or securities and the other side is bound to purchase them, relief should (as with ‘buy and sell’ agreements) be denied.

Property should not be regarded as disqualified under this provision where the transfer of value is itself a sale for partial consideration.

Subject to the above, unless there is some indication that a contract for sale existed at the time of transfer, there is no necessity to enquire in every case.

Occasionally agreements are seen where

a. the deceased’s interest passes to the surviving shareholders, who are required to pay the personal representatives a particular price

Or

b. the deceased’s interest falls into the estate, but with an option for the surviving shareholders to purchase it.

Agreements of these types do not constitute contracts for sale. They do not prevent the interest from qualifying for BR by reason of section 113 IHTA 1984.

Lifetime transfer of relievable property followed by a sale

Background

Lifetime transfers of relievable property are sometimes made after a sale has been arranged or negotiated but shortly before the binding contract is entered into. When this happens, valuers need to consider whether BR is available.

If there was no binding contract for sale at the date of transfer/death BR will be due.

Relevant questions to consider

If a sale takes place in the circumstances described above a valuer should

• ascertain the facts, and

• obtain any relevant document relating to the transfer and all the documents by which the sale was

- agreed and
- effected.

Additional Guidance: SVM150000