In the current business climate, it is more important than ever to maximise shareholder value, and with many businesses looking to cut costs and save money, reviewing tax policies and making sure the business is structured to ensure that all available tax reliefs are maximised for the shareholders is vital.
One of the often forgotten areas is inheritance tax (IHT), and companies need to understand how their commercial business decisions may affect their shareholders’ IHT positions. It follows that the corporate strategy should take into account the shareholders’ personal tax positions and their potential IHT exposure.
There is a general belief that if one is looking at a private trading company, all the shareholders would escape any IHT charge on the value of their shares on death due to the availability of business property relief (BPR). However, due to the complexity of IHT legislation, many business owners are unaware that a potential, or actual, IHT liability does exist.
This is of particular importance in the oil&gas industry, where private companies make up a significant proportion of businesses active in the sector. These companies can be complex and have large international structures. When operating across borders, there are certain parts of the world where an overseas entity cannot own 100% of the local business, which must be majority owned by nationals. All this adds complexity and IHT can often be forgotten in the intricate process.
With careful consideration of group structures, the company can maximise the availability of BPR and therefore reduce the potential IHT exposure for the shareholders.
BPR provides up to 100% relief from IHT on shares in unquoted companies. There are three main tests to determine whether BPR is available.
The first test relates to the type of shareholding. The basic premise is that relief should be available when a company is not wholly, or more than 50%, involved in holding or making investments. What is important here is that, in looking at the company’s activities, you must consider not only profits, but also the business capital, turnover, time invested by staff and the overall context of the business within the portfolio.
If the company has a number of subsidiaries, its shares can still qualify for BPR if it is overwhelmingly a trading company, even though its shares in subsidiaries count as investments. If the business of the company is mainly that of acting as a holding company for the subsidiaries then, provided the group as a whole is able to pass the relevant tests, BPR should be available.
At this stage, BPR can potentially be granted at the rate of 100%, but it is not necessarily that simple. Further tests need to be considered to ascertain whether the relief should be restricted in some way.
The second test requires one to take into account any investment (that is, non-trading) companies within the group. If there are any such companies, their values will be excluded from the relief total.
There are a couple of problem areas which frequently arise with investment companies, and these are mainly around property letting.
If property letting is carried on through a subsidiary, as opposed to within a trading company, then the property subsidiary should be treated as an investment company and none of the value attributable to it would qualify for BPR, as property letting is not a qualifying trade.
However, because the BPR rules refer to “businesses” rather than “trades”, which is a much wider definition, if the company is mainly trading with only a small part of the business being the letting of properties, then there should be no BPR restriction.
When considering the businesses of subsidiaries, care must therefore be taken to ensure that a company which has property letting as part of its business is, nevertheless, mainly a trading company to prevent it from restricting the availability of BPR.
It can be IHT-efficient to hold non-trading properties, which qualify as a business, in a mainly trading company to ensure that BPR is available for the whole company.
Where there is a subsidiary whose business consists wholly or mainly of holding land and buildings occupied by other group members, this company should qualify for BPR under the first test.
Unfortunately, if the group has a minority shareholding in a company, the investee company will be treated as an investment company and its value will be excluded. This rule applies even if the investee company is an integral part of the trading activities of the group.
This is a likely scenario for many oil&gas companies where this structure may be a commercial necessity in order to provide an integrated offering or simply that it is what the law requires as a consequence of countries extracting the maximum value from their natural resources.
The third test relates to “excepted assets”, a term that covers assets that are not held for the purposes of the underlying business. So, for example, cash balances could be considered surplus to business requirements unless it can be shown that they are being held for a specific project. With that being the case, planning is essential – as is getting the right advice.
While the industry has been subjected to a period of swift adjustment, the past few years have been good for many businesses in the sector and they will still have cash balances. Keeping cash, especially with restricted access to credit, can be a good move for any business at the moment. However, in doing this, it will still need to be properly allocated and assigned to a project.
In this time of increased consolidation in the upstream industry, it is also important to consider that whenever there is an acquisition, merger or reconstruction, then the personal goals of the business owners should be discussed to ensure that any business decision fits into the personal wealth strategy, whether this is succession or exit from the business. The right tax planning in this area can save not only a lot of money, but also a lot of time and effort at a point when it will really be appreciated. It is possible to make certain plans in uncertain times.
Colin Pearson is a tax partner with Ernst & Young