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Clearance criteria

When considering anything other than purely mundane tax or financial planning, most clients would obviously like certainty that what is being planned will succeed. This is even more desirable where the transaction has high financial value or cost.

There are some statutory provisions for tax clearance which are especially important in connection with the sale of a business. It was therefore welcome that from May to October, HM Revenue & Customs tested a non-statutory clearance procedure on the availability of business property relief for inheritance tax. The trial period has now ended and HMRC has confirmed to us verbally that the results of the trial will be evaluated and, depending on the outcome, the clearance procedure may be reinstated.

Looking at how the trial clearance procedure worked, the main criteria to satisfy to seek clearance were that there was material uncertainty as to the interpretation of any legislation and that the issue was commercially significant. Clearance could be sought either before or after a transaction. The system went well beyond the normal code of practice 10 procedure, under which technical questions on legislation within the last four Finance Acts will be taken.

HMRC aimed to reply within 28 days of the application with a written confirmation that the taxpayer could rely on. Applications had to be made by post or email to the IHT/BPR clearances team in Nottingham. Email was the preferred method, except where there were big attachments or the information was sensitive or related to someone well-known.

The procedure was not available simply to obtain HMRC comment on tax advice or to approve tax planning strategies, nor did HMRC accept clearance applications for arrangements which in its view were primarily to gain a tax advantage rather than primarily commercially motivated.

The trial was a welcome development, especially if it is indicative of a wider recognition by HMRC of the importance attributed by the taxpayer to the certainty that such clearances deliver. There will undoubtedly be situations where the tax implications of business transactions, or transactions by business owners involving business assets, will be a very important aspect of whether or not the transaction is carried out, at least in the form contemplated.

To take the example of BPR, its availability or not in any particular case can be critical to the making of a lifetime gift. If it is available, there will be no IHT on a transfer. If it is not, then there could be, at the point of making the transfer (if it is other than an outright transfer or a transfer to a bare trust) and/or on the death of the donor within seven years of making the transfer.

In this case, it is important to bear in mind that it will also be necessary for the donee to satisfy the necessary conditions for BPR in connection with the gifted or substituted property at the time of the donor’s death within seven years of the transfer. Once the donor has survived the gift by seven years, there is no chance of any liability arising on the gift itself. The gift could, however, affect the tax payable on a subsequent gift made within the seven years following the gift in question.

If BPR is available on business assets, it is unlikely that an IHT-motivated gift will be high on the tax planning agenda. The fact that the assets are free of IHT, together with the revaluation of the assets for capital gains tax purposes on death, will mean that in most cases, holding the assets until death will make good tax sense.

It is worth remembering that a business has to be wholly or mainly a trading business to qualify for BPR and there has been much case law on this point.

The warning that the clearance procedure was not available simply to obtain HMRC comment on tax advice or the approval of tax planning strategies that are tax-motivated will, however, put a very important limitation on the extent to which the procedure could be used by a business to determine whether BPR applies to it. There would have to be material uncertainty as to the interpretation of the legislation and the issue would need to be commercially significant.

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