Investment company switch could save inheritance tax

The issue

Shares in investment companies are generally subject to inheritance tax (IHT) when the shareholder dies. This position can be contrasted with shares in trading companies which benefit from 100% Business Property Relief (BPR). It would therefore be very attractive if we could wave a magic wand and turn an investment company into a trading company prior to death. In certain circumstances this may be possible.


Robert owns a company which rents office space. He is approached by a developer who feels that one office block (which represents 70% of the portfolio) could be developed into residential apartments subject to planning. Robert agrees a deal whereby the developer will seek planning permission and oversee construction, in return for 30% of any profit (payable as a fee).

From a tax perspective the office will be appropriated into trading stock at the point where the company crystallises its trading intention. This would result in a capital gain arising, based on the property’s market value. The company could elect to defer this gain into the cost of the stock, meaning that tax would only be payable when the trading profit is realised. If Robert were to survive two years from the date of this appropriation, then 100% BPR should be available on death. Furthermore, there is a strong technical basis for arguing that BPR is available, even if Robert survives less than two years. This is because, in this situation, the two-year ownership requirement applies to the holding of the shares, and not to the length of time trading. It is unclear whether HMRC agree with this latter view.

Forbes Dawson view

Clearly, it will not always be viable to change an investment company into a trading company, but this should be considered in appropriate circumstances. There will be times when an investment company finds itself holding cash after it has sold, part or all of, its investment business. In such circumstances there could be significant IHT advantages in using the funds to set up a trade, or even to ‘invest’ in a trading LLP. Helpfully, provided the company is predominantly (more than 50%) a trading company, then BPR will still apply to any subsidiary investment activity which is also carried out. This point is often forgotten.




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