Business Property Relief (BPR) from Inheritance Tax (IHT) is lost where a business is found to be wholly or mainly operating as an “investment” business rather than a “trading” business. Given that the value of business assets can be significant and BPR may relieve 100% of that value from IHT, there have been a number of cases between taxpayers and HMRC on the dividing line between investment and trading businesses.
Just over a year ago we reported on the implications of two of those cases. In Vigne HMRC were defeated in the First Tier Tax Tribunal (FTT) by the taxpayer who successfully argued that the level of additional services provided on a 30 acre “DIY plus” horse livery business were sufficient to establish a trading business for the purposes of BPR. In Ross , one of a number of cases to assess the availability of BPR to furnished holiday lettings (FHL) businesses, HMRC successfully argued that additional services provided were not sufficient to establish a trading business.
Since then two further cases have provided more detail on the dividing line between investment and trading businesses in this context. In both cases the taxpayer was successful. On appeal to the Upper Tier Tax Tribunal (UTT) , HMRC were unable to overturn the FTT’s decision in Vigne and in Graham , the taxpayer was able to show that an exceptional level of additional services provided in an FHL business was sufficient for BPR to apply.
There was further discussion of how the level of additional services provided in each case place a particular business on a spectrum between investment and trading. At the investment end of the spectrum, activities such as maintenance required to generate income from the land, granting tenancies over that land and so on, will certainly not meet the BPR threshold. At the trading end of the spectrum running a hotel or a shop from premises owned by the trader will qualify.
The activities of a business that exploits land for profit must be looked at in the round to see whether the business is one that qualifies for BPR. There is no bright dividing line between those businesses that qualify and those that do not. It is worth noting that the apparent questioning by the FTT of the approach taken in Pawson was not maintained by the UTT. Pawson had applied the correct test and, despite a reference to a transposition of the statutory test in Pawson being “somewhat unhappily expressed”, so had the FTT. This analysis was echoed by the FTT in Graham which described criticism of the approach in Pawson as “misplaced”.
The FTT’s application of that test to the facts was not overturned. The provision of additional services including worming products and feed, removing manure and daily health checks for the horses amounted to a business which was “mainly trading”.
The decision will be of interest to owners of horse livery businesses, especially those already providing a “DIY plus” service. It may also provide a basis to claim BPR for a broader range of activities carried out on diversified farms and landed estates which might previously have been thought to be investment-type activities.
As we reported, in Ross BPR was denied and it was difficult at that time to see what FHL owners could do to provide additional services sufficient to qualify for BPR. Graham answers that question.
BPR was found to apply to an “exceptional” FHL business with additional services that placed it at the hotel end of the investment-trading spectrum and even then only “just” fell on the “non-mainly-investment side of the line”. Indeed, the farmhouse from which the business operated had previously been run as a bed-and-breakfast and then a small hotel before being converted into four self-contained flats in and adjoining the main building.
The FTT gave a very helpful breakdown of the level of additional services required to meet the BPR threshold, even if those additional services will likely be more than many such FHL businesses can offer. The FTT even calculated an admittedly very rough division of the time spent on a particular activity such as gardening and maid services, allocated to how much comprised maintenance of the building and management of the letting, i.e. investment level activities, compared to how much comprised additional service, i.e. trading level activities.
The FHL business in Graham offered a number of services that might not even be found in small hotels including a swimming pool, a sauna, bike hire, a large ornate garden and, in particular, the personal care and attention provided by the business owner’s daughter. She was found to contribute in the region of 4,000 hours work annually of which nearly half were above that required for maintenance activities. Taking the various additional services together in the round there was enough for BPR to apply even though aspects which would normally be provided by a hotel, such as meals and the daily making of beds, were not provided.
It is worth noting that in both Vigne and particularly in Graham, weight was attached to the fact that the business required an employee or owner to be physically present at the business in order for the additional services to be provided. This feature was found to be inconsistent with purely investment businesses.
It is not yet known whether HMRC will appeal. The case has wider implications for FHL businesses but HMRC may accept that very few will be able to provide a level of services similar to those in Graham. Equally, it is possible that some additional services that the FTT would expect to be provided by a hotel might be at the upper end of the level of services provided by very basic hotels, especially those with increasingly automated systems.
BPR is complicated to apply and the facts of each particular case need to be considered carefully.
The Office of Tax Simplification is carrying out a consultation of how to reduce the complexity of IHT and has recently published its first report largely focussing on administrative aspects of the IHT system. A second report is due to be published in Spring 2019 which will address more complicated aspects of IHT including BPR. We will report on that too in due course.
For more information please contact Edward Porter, Senior Associate, or your usual Michelmores contact.
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