Law Stated At:
31 October 2016
The ‘wholly or mainly’ test
Property will not be ‘relevant business property’ if the business consists wholly or mainly of making or holding investments. This is so whether the gifted asset is a direct interest in the business concerned, or shares in or securities of a company (s 105(3)). However, this will often be a question of fact.
In Brown’s Executors v IRC  STC (SCD) 277, the Inland Revenue (as it then was) refused BPR on shares on the grounds that, at the date of death, the business consisted wholly or mainly of making investments. The company had been in the nightclub business but had sold this before the shareholder’s death. The proceeds were held on a short-term bank deposit pending acquisition of a new business. The executors appealed successfully to the Special Commissioners.
HMRC now appear to accept that, if a company is wholly or mainly trading, the fact that it owns some investments does not prevent the shares from being relevant business property, though this will be a matter of degree. To determine whether the ‘wholly or mainly’ test is satisfied, it is pertinent to consider:
- the amount of time that the directors and employees devote to each part of the overall business; and
- underlying asset values, ie the amount of capital devoted to each aspect of the enterprise.
HMRC normally interpret ‘mainly’ as over 50%. Note, however, that the argument that ‘extraneous’ assets should not prejudice BPR is much weaker in respect of sole traders and partners than companies. This is because the business of a company is a single entity to which all its assets may contribute, whilst that rule does not apply so strongly to unincorporated businesses, which can be divided into enterprises that are ‘proper’ trades and non-qualifying ventures or assets.
BPR is a ‘snapshot’ test, in that the eligibility of, say, shares in a private company is tested at the time of the transfer. This may open up some planning opportunities where the shares in a dormant company have been held by the taxpayer for over two years. However, HMRC will closely examine, and deny relief to, any ‘business’ that is, frankly, dormant, perhaps because the owner was winding down to retirement or the venture had become no more than a hobby. To support the BPR claim the practitioner must be able to produce clear evidence of trading activity. Whilst Brown’s Executors v CIR  STC (SCD) 277 shows that BPR may be claimed even in respect of a company that had sold its business, the evidence there was strong that the director was looking for a new venture in which to reinvest the company’s ready money.
Where the transfer is on death look, therefore, among the papers of the deceased for minutes of meetings, correspondence about the purchase of equipment or premises or stock, or for other evidence that the entrepreneur was taking risks or laying out time, money and effort to promote the business.
Example 15.1 – Maximising BPR
East Anglian Fabricators Limited was formed by Kevin to make components for agricultural buildings. It owns a substantial freehold site in Norfolk including several acres of pasture.
Agrisite Limited was formed as a sister company to keep Kevin’s son Jason occupied after he left school. The idea was that Jason would deliver the components to farmers and help with erection of the buildings, but Jason drifted into conveyancing law and moved to London. Agrisite was mothballed. Farming declined and the construction business stalled.
Hindolveston Pastures Limited had similarly been formed to give an opportunity to Carrie, Kevin’s daughter. Carrie was to look after the pasture and keep her horses there, if possible making a little money from her ‘horsey’ friends. Carrie exploited the land to the full, gradually building small workshops and industrial units which she let very successfully, returning substantial revenue to Fabricators as landlord.
Kevin realised that, in terms of value, Fabricators was no longer really a trading company: Carrie’s efforts swamped the construction business in terms of capital value created, revenue and the use of management time. Even the value of the construction side of the business did not qualify for any relief. Meanwhile Jason, who was made redundant, had come home and wanted work.
Kevin arranged a sale of the construction business and its freehold premises, (excluding the former pasture, now an industrial estate) to Agrisite so that, if trade improved and Agrisite paid off its inter-company loan incurred on the purchase, any new value in Agrisite would qualify immediately for BPR.
Assets of a business; or used in one?
It may be difficult to identify the assets used in an unincorporated business, particularly that of a sole trader.
Example 15.2 – A business, or excepted assets?
Alex works from home as a veterinary surgeon but also owns and trains dressage ponies and runs a small riding school. Her establishment comprises a former farmhouse, outbuildings, surgery, tack rooms, paddocks and areas where customers can park their trailers and relax whilst waiting to collect their offspring after riding lessons. The house has five bedrooms but only one ‘proper’ reception room, the other having been invaded by the administrative functions of the business, whilst much of the former kitchen and dairy has been converted to a surgery with associated reception and store for drugs and dressings.
Horses are Alex’s life: she has no family, so most of the bedrooms are full of disused ‘horsey’ artefacts or business records.
The accounts of the business do not show the house as a capital asset but do include all the historical cost of improvements to it and of conversion of the building for business purposes as well as the cost of erecting stables etc over the years. VAT has been reclaimed on all such works. Alex’s (obligatory) 4x4 vehicle, her horsebox and trailers are shown as assets of the business. Alex claims a (substantial) proportion of the running cost of the house as business expenses. The house is free of mortgage.
In these circumstances a strong case can be made out that much of the house and all of the outbuildings, paddocks etc are not merely used for the purposes of the business but are assets of it. The fact that the house is not shown on the balance sheet is not in itself conclusive.
This is relevant for several reasons. Relief may be allowed where part (but not the whole) of a building is used for a business under s 112(4). Relief on an interest in a business is at 100% whilst relief on an asset used in a partnership business is at 50% only, so if Alex took on a partner the issue would have to be addressed. The use of a part of a building also has CGT implications, depriving its owner of main residence relief to the extent that it is used exclusively for a business.
For a further examination of whether a building was itself the business, see Marquess of Hertford v IRC  SpC 444, discussed at 15.20.
The business of a landed estate
In Farmer and another (executors of Farmer deceased) v IRC  STC (SCD) 321, the deceased carried on the business of letting properties as well as the business of farming. The profits of the letting business were greater than the farming profits, but the farming assets, admittedly including the farmhouse itself, were (at death) more valuable than the properties used for letting. The Revenue (as it then was) refused BPR, arguing that because the profits of the letting business were greater than those of the farming the business was wholly or mainly one of making investments.
The executors appealed to the Special Commissioners and won. It was held that the nature of the business had to be considered in the round and that no single factor (such as profitability) should be determinative. On the facts, although the lettings were more profitable than the farm, the overall context of the business, the capital employed, the time spent by the employees and consultants and the levels of turnover supported the conclusion that the business consisted mainly of farming.
The issue of mixed usage in the context of a landed estate was revisited in the Upper Tribunal on appeal in HMRC v Brander  UKUT 300 (TCC). The facts were somewhat unusual and ‘muddied the waters’ to a degree. There were two issues in contention: (a) whether or not there was a single ‘business’ and (b) whether or not that business consisted mainly of holding investments. The activities carried on included in-hand farming and management of commercial woodlands; however, there was also substantial letting activity.
At the time of his death, the whole of the estate was owned personally by the deceased; however, up until the period shortly before his death part of the estate had been held in a trust of which the deceased was the life tenant. Furthermore, farming activities on the estate had, at certain times, been carried on by the deceased in partnership and at other times on his own account. One consequence of this was that different sets of accounts were prepared for different parts of the business, and this practice continued until the death of the deceased.
Notwithstanding the preparation of separate accounts the tribunal accepted that the land was managed as a single business by the deceased. It was perhaps significant that the deceased had adopted a very ‘hands-on’ approach and the role of the trustees was largely passive. In deciding whether the business was wholly or mainly an investment business, the tribunal reviewed what it considered to be the main factors of relevance, namely:
- overall context;
- turnover and net profit;
- time spent; and
- capital value.
Having done so, the tribunal accepted that the First-tier Tribunal was entitled to conclude that the business was not mainly a business of making or holding investments, and dismissed HMRC’s appeal.
The business of making loans
In Phillips and others (Executors of Rhoda Phillips Deceased) v HMRC  SpC 555, shares in a company which made informal, unsecured loans to related family companies were held to be relevant business property, on the basis that the company’s business was making loans, and therefore did not consist wholly or mainly of making or holding investments within s 105(3).
The business of developing land
In DWC Piercy’s Executors v HMRC  SpC 687, the Tribunal had to consider a property development company that owned land in Islington on which it had built workshops for letting. The executors of a major shareholder claimed BPR, but HMRC denied it on the ground that the company received substantial investment income and its business was therefore mainly making or holding investments.
The executors claimed that the company was still trading: it still held undeveloped land that it wished to develop for housing but had to wait for uncertainty to be resolved concerning proposals for a new railway line. The Commissioner found that the land was still held as trading stock, not as an investment, and allowed the appeal. A land-dealing company will not qualify for BPR if it is a speculative trader or dealer, but all other land-dealing companies that actively develop land or build on land are outside the exclusion. For a company to be wholly or mainly holding investments, the Commissioner held that it must actually have investments: thus holding the land as trading stock was highly relevant here.
The business of letting property
The Special Commissioners’ decisions in Martin and another (executors of Moore Deceased) v IRC  STC (SCD) 5 and Burkinyoung v IRC  STC (SCD) 29 should be noted. In these cases, the taxpayers’ claims for BPR failed. In Martin, the business consisted of owning and letting industrial units on three-year leases at fixed rents. The activities included finding tenants, granting and renewing leases, complying with the landlord’s covenants under those leases and managing the premises. To the extent that these activities went beyond straightforward investment activities, they were nevertheless held to be incidents of the business of making or holding investments. Thus, BPR was denied. It was the nature of the business that mattered, not the amount of effort that the owner put into it.
A similar decision to Martin was reached in Burkinyoung, where the deceased had divided a house into four flats and let them, furnished, on assured shorthold tenancies. Although she was actively involved in the control and management of the let properties, these activities were incidents of the landlord-tenant relationship and accordingly part and parcel of making and holding investments.
Two points clearly emerged from the Martin and Burkinyoung cases. First, no distinction is to be drawn between investments that are actively managed and those that are passively held. Secondly, in the case of property investment, one must distinguish between activities carried on qua landlord and activities which are independent of the landlord-tenant relationship. Activities undertaken by the landlord to ensure compliance with his own obligations under the lease, to enforce compliance by the tenant, or to preserve his investment in the property (eg repairs) are in the first category. The second category consists of activities which are independent of the lease and which are charged for separately. Examples might include heating, cleaning and catering. Even if these services are provided separately, the charges are likely to be insignificant compared to the rental income and thus it will be rare for BPR to be available.
The principles established in Martin and Burkinyoung were applied in Clark and another (executors of Clark deceased v HMRC  STC (SCD) 823, where a company received rents from properties which it owned (ie investment income), plus management charges in respect of a number of dwellings owned by family members (ie non-investment income). Looking at the case in the round, the Special Commissioner held that the company’s business consisted mainly of holding investments.
Trustees of David Zetland Settlement v Revenue and Customs  UKFTT 284 (TC) concerned a former factory premises that had been converted into a large number of units providing flexible office space for computer, media and technology businesses. The building had a cafe, gym, cycle park, Wi-Fi, portage, 24-hour access, meeting rooms, media events, outdoor screens for viewing football matches and film shows as well as an art gallery area. It was run on the basis of a community with regular barbeques and socials. However, some of these facilities were run by tenants rather than by the landlord, and the remaining activities which were not investment related were not sufficient to tip the balance in favour of obtaining business property relief.
It was a similar story, and a similar result, in Best (executor of Buller, decd) v Revenue and Customs Comrs  UKFTT 77 (TC),  WTLR 409. The appellant in that case sought to show that the units would be unlettable without the additional services that were being provided, but the First-tier Tribunal found the arguments unconvincing.
Caravan park businesses
In Hall (deceased) v IRC  STC (SCD) 126, the business consisted of a caravan park of 18 acres for 100 caravans and 11 wooden chalets. These were let and various services and facilities were made available to the tenants, eg water, electricity, telephone, refuse disposal and lavatories. Nevertheless, the Special Commissioners denied BPR on the grounds that the business was substantially one of investment, ie the receipt of rents. A similar approach was adopted in another caravan park case, Powell v IRC  STC (SCD) 181.
In contrast, in Furness v IRC  STC (SCD) 232, the business of running a caravan park was held not to consist wholly or mainly of making or holding investments within s 105(3). However, the business was unusual because over 50% of the net profits came from caravan sales and charges for caravan rallies held at the site. The amount of work carried out on the park by the deceased and his employees was also considered by the Special Commissioner.
In Weston (executor of Weston deceased) v IRC  STC 1064, the Special Commissioners held that shares in a company that ran a caravan site were not relevant business property. This decision was upheld by the High Court. The business included buying and selling caravans, buying and selling caravans for commission on behalf of the owners, and granting the right to pitch caravans in return for pitch fees. The question was ultimately one of fact and the Special Commissioner had applied the right test. The ‘business’ consisted substantially in the ownership and letting of caravan park pitches, ie making or holding investments. Other activities such as selling caravans were subordinate activities.
The Court of Appeal decision in IRC v George and another (executors of Stedman, deceased)  STC 147 marked an important victory for the taxpayer. Looked at in the round (à la Farmer), this caravan business was clearly a trade and not merely the holding of investments. Lord Justice Carnwarth decided that it was difficult to see why an active family business such as that in this case should be excluded from BPR under s 105(3) merely because a necessary component of its profit-making activity was the use of land. The message for the practitioner is clear: marshal your facts and evidence with great care.
In this case, at the time of the death in 1998, there were 167 mobile homes, owned by the occupiers, on the residential park. The company charged a fee to the owners for the use of the site; it also sold caravans, and charged a commission on the sale of caravans by the owners. A profit was also made on the supply of gas, water and electricity to residents.
HMRC guidance (at IHTM25279) provides a useful insight into its approach following the decision in George, and is therefore worth repeating here:
‘The judgment in George is helpful in clarifying what is to be regarded as either investment or non-investment activity. It makes clear that the provision of services under the terms of a pitch agreement is a non-investment activity. This means that in cases where a large part of the business’s activities (measured in both time and money) consists of providing services to residents, we would be more likely to consider that the business was neither wholly or mainly investment in nature. However, we need to be satisfied that the figures for pitch fees, for instance, are not artificially depressed in the accounts in favour of inflated figures for wages or other non-investment expenses.
The judgment in George also recognises that the time and money spent on maintaining amenity areas is in part designed to maintain the value of the owner’s investment. It follows that the taxpayers are entitled to return a reduced level of investment income by offsetting against it part of the maintenance costs. As this could lead to the net investment income being, proportionally, a smaller part of the overall income of the business we might well conclude in a particular case that the business was neither wholly or mainly one of holding investments. On the other hand, we would also need to take into account the time spent by the owner and/or his employees in the maintenance work. When taken together with other work carried out in the business, the evidence might lead us to conclude that the majority of work done is involved in maintaining the value of the owner’s investment. If so, then we would seek to deny the claim under Section 105(3) IHTA 1984.
The judgment in George also suggests that the holding of land as an investment is separate and distinct from the service element of the business. Finally, when looking at the facts “in the round”, trading figures are only a part of the overall picture.
When dealing with a claim for business relief on a caravan park, you will need to obtain detailed business accounts, including breakdowns of both the income and expenditure between the investment and non-investment elements of the business. In addition, you should ask the taxpayers to state precisely what services were provided to the park residents and how long was spent by the deceased (as park owner) and his partners and/or employees providing those services.
After obtaining all the information, you should refer the case to Technical Group.’
Any practitioner dealing with this issue would do well to visit the park site. Generally, such parks may offer space in one or more of the following categories:
- mobile homes;
- pitches for touring caravans that are taken for the season; and
- pitches for ‘pull-on tourers’, ie cars with towed caravans which visit just for a few days and (increasingly nowadays) campervans passing through.
Of all these categories, it is the last that makes the most work for the site owner. A pitch may be taken for only one night; people arrive late, hoping nevertheless that the site shop will still be open and will have fresh (local) produce left. It must sadly also be said that a slightly less careful attitude to the site may be exhibited by someone who is moving on than by a more permanent resident! Undoubtedly, the letting of a pitch for a whole season is attractive, both in providing reliable cash flow and in securing goodwill for eventual sale of the site. To enhance his claim to BPR, however, the cases show that a site owner should cherish his ‘pull on’ customers and put up with the work they cause him.
Holiday lettings may qualify for BPR if the landlord contributes active management and services, but in light of recent cases, it may be concluded that the circumstances in which it will qualify will not be especially common. It is necessary to show that the activity in question constitutes ‘trading’ and not ‘a mere investment’. See the Special Commissioner’s decisions in Martin and Burkinyoung (discussed at 15.13).
Until November 2008, HMRC’s Inheritance Tax Manual indicated that BPR would normally be allowed if the lettings were short term (eg weekly or fortnightly) and there was substantial involvement with the holidaymakers both on and off the premises. This applied even if the lettings were for only part of the year.
HMRC’s guidance (at IHTM25278) was amended in November 2008, to state the following:
‘Recent advice from Solicitor’s Office has caused us to reconsider our approach and it may well be that some cases that might have previously qualified should not have done so. In particular we will be looking more closely at the level and type of services, rather than who provided them.’ (emphasis added)
The guidance indicates that cases involving claims for BPR on holiday lettings should be referred to HMRC’s Technical Team (litigation). It was clear from the change in guidance that HMRC were taking a more robust approach to this sort of business activity and that a test case was likely.
The test case came in the form of Pawson (deceased) v HMRC  UKFTT 51 (TC). The degree of involvement with holidaymakers, and the level and type of services provided, were not extensive; and neither was the business pursued in a particularly earnest manner. Nevertheless, the First-tier Tribunal agreed with the taxpayers that the business was not one that consisted of holding an investment, commenting that an intelligent businessman would regard the business as involving far too active an operation for it to come under that heading. However the decision was successfully appealed by HMRC ( UKUT 050 (TCC)). The Upper Tribunal noted that some business activities carried on naturally fell on the investment side of the line, but that certain additional services were provided to occupants as part of the holiday letting business. Those additional services comprised: a cleaner/caretaker to clean the property between each letting and carry out regular inspections of the property; space heating and hot water; a television and telephone at the property; being on call to deal with queries and emergencies; and minor matters such as the replenishment of cleaning materials as and when necessary, and the provision of an up-to-date welcome pack (laundry services were also provided, but only after Mrs Pawson’s death).
The Upper Tribunal considered that the critical question was whether those additional services prevented the business from being mainly one of holding the property as an investment. The Upper Tribunal noted that the judgment in IRC v George and another (executors of Stedman, dec’d)  STC 147 made it clear that the provision of such services is ‘unlikely to be material’ in the case of a property letting business because they were not enough to prevent the business remaining ‘mainly’ one of property investment. The services provided were considered to be of a relatively standard nature. Looking at the business in the round, in the Upper Tribunal’s view there was nothing to distinguish it from any other actively managed furnished holiday letting business, and there was certainly no basis for concluding that the services comprised in the total package were such that the business ceased to be one which was mainly of an investment nature.
Since the Pawson case there has been a further decision concerning holiday lettings – Green v HMRC  UKFTT 334 (TC). The business in that case consisted of a large property divided into five units of self-contained holiday accommodation. Compared to the facts in Pawson the business was carried on in a more earnest manner and the average annual income was much greater. However, the services provided to holidaymakers were not more extensive than might normally be the case. The decision went against the taxpayer. Although the provision of services to holidaymakers were a part of the overall business, they did not prevent the business being mainly one of holding an investment.
Following Pawson and Green, therefore, it appears that relatively few holiday letting businesses are likely to qualify for BPR. In order to qualify, the ‘level and type’ of services provided will need to be sufficient to outweigh the investment element of the business. This will require a greater degree of involvement with holidaymakers than is seen with many holiday letting businesses.
Other types of lettings involving land may fall foul of s 105(3) in HMRC’s view. Its guidance states (at IHTM25280): ‘You will need to consider whether the exploitation of land ownership in other ways, such as self-storage, car parks, business parks, DIY livery, moorings or beach huts, is an investment activity.’
The business of producing a crop of grass
Land may qualify for both APR and BPR but APR is restricted, as noted at 16.2, to the agricultural value of the land. That was the main issue in McCall and another (Personal representatives of McLean Deceased) v HMRC  NICA 12. A parcel of land had an agricultural value, at the date of death, of £165,000 but a market value of £5,800,000 so it was important for the executors to show that there was, at the date of death, a business qualifying for BPR rather than an agricultural interest.
The deceased did not farm the land herself, but let it to local farmers under conacre (or agistment, to be more precise) agreements. The Revenue issued a determination charging IHT on the land, and her personal representatives appealed on the basis that BPR was due. The evidence suggested that the son-in-law of the deceased had spent time looking after the land. It lay on the edge of a town in Northern Ireland and its boundaries were occasionally challenged. For example, a van was driven into the fields and abandoned, resulting in a claim under the Criminal Damage (Compensation) (Northern Ireland) Order 1988 (SI 1988/793).
The work done was:
- walking the land;
- repairing the fencing;
- cleaning drinking troughs;
- clearing the drainage systems of mud and leaves; and
- cutting and spraying weeds.
For these purposes, the son-in-law had a tractor and reaper and a knapsack sprayer. He probably worked no more than 100 hours per year. Some work was contracted out. The grazier fertilised the fields.
Before the Special Commissioner  SpC 678, it was held that the son-in-law’s activity of tending the land:
‘… was, just, enough to constitute a business … The letting of the land was earnestly pursued, the work tending the land was modest but serious, the letting and tending were pursued with some continuity, the income was not insubstantial, the letting was conducted in a regular manner although the use of [the son-in-law’s] time was something which is not a feature of an ordinary business, and the letting of land for profit is a common business. To my mind the Lord Fisher indicia point towards a business.’
A business may be owned even where the sole trader has, as was the case here, lost her mental faculties. The business was more than just the ownership of the land and receipt of its income. The deceased, notwithstanding disability, owned the business constituted by the activities of her son-in-law and the letting of the land. However, the most material point for our present examination was that the Court of Appeal upheld the conclusion of the Special Commissioner that the business consisted wholly or mainly of holding investments, within s 105(3). Girvan J stated:
‘The agisting farmer had exclusive rights of grazing; he was entitled to exclude other graziers including the deceased; the deceased could not use the land for any purpose that interfered with the grazing and the letting for grazing was the way in which the deceased decided that the grasslands could be used and exploited as uncultivated grassland short of the creation of a lease. The deceased’s business consisted of earning a return from grassland whose real and effective value lay in its grazing potential. The activities which were regarded as just sufficient to lead to the lettings of the land being regarded as a business were all related to enabling that potential value to be released.’
Here the deceased was making the land available, not to make a living on it, but from it; the management activities related to letting the land; it was unlike ‘hotel accommodation for cattle’ as argued by the taxpayer. Thus, although the letting of land does not necessarily constitute an investment business, the availability of BPR is likely to depend on the nature and extent of other services also provided.
See 16.16 concerning the availability of APR on such land, which will be particularly in point when there is a farmhouse relating to the land.