Inheritance tax relief for property-based businesses
Written by 5 April 2018
Property-based businesses often fail to obtain BPR due to their investment nature and here we summarise some of the pertinent points.
Landed estates and other mixed landholdings
The concern for owners of mixed units is that any part of the land which is let out to a third party may result in the overall entity losing BPR.
There are two very important cases in respect of BPR on mixed landholdings – the Farmer case from 1999 and the Balfour case from 2010. Farmer established that where there is a mix of activities, there are five quantitative tests to establish if investment represents over 50% of the whole.
These tests consider:
- Time spent
- Capital utilised
- The (less tangible) ’look and feel’ of the business
The more recent case of Balfour also used a similar test, and as such the ‘Farmer matrix’ has become a commonly used tool to review a mixed business structure to assess its likelihood of obtaining BPR.
Furnished Holiday Lettings
Furnished Holiday Lettings (FHLs) are classified as a business for certain tax purposes, but are often denied inheritance tax relief as they are deemed to be a business primarily consisting of holding investments. In 2013 the case of Pawson resulted in the taxpayer being denied tax relief because the level of service provided as part of the holiday lettings was comparatively low. Advisers were of the opinion that a higher level of service should result in tax relief being granted.
The 2017 case of Ross also denied relief on FHLs, and in that case there was a significant provision of additional services. The Ross family had an agreement with the neighbouring hotel which allowed the FHL guests the use of the hotel services, including food, babysitting, taxi, linen changes and other ad-hoc services during their stay. The First Tier Tribunal decided that the services were incidental, and that the reason the guests chose to stay there was to enjoy the premises exclusively – thus meaning this was an investment property.
It remains to be seen if this will be appealed, but it does cast doubt on any BPR claim on an FHL where there is not an exceptional level of service.
Other land and property
A considerable number of cases concerning other property businesses have been heard, including caravan parks, large commercial buildings and grazing land, and in most cases the taxpayer’s claim for BPR has failed unless there is a significant trading element. The Martin case in 1995 noted that the use of sound business principles (while elevating the activity from mere investment into that of running a business) did not change the fact that the business was still that of holding investments, and as such BPR was not available. The more recent Zetland case in 2013 has also considered this, and used the same criteria, thus giving an element of certainty of treatment.
Thus, services which increase the rent (eg actively sourcing tenants, keeping the property in a good state of repair and making it a more attractive rental proposition) do not in themselves make a BPR claim possible as they represent active business activity, but the underlying business remains that of investment.
The recent Vigne case (2017) where the family ran a livery yard with the provision of some ancillary services was one where BPR was successfully claimed. This is encouraging, but as HMRC have appealed this, it may be a short-lived victory.
Where there is a business that includes some letting by way of diversification, this may still allow BPR under Farmer/ Balfour principles, as long as the overall weighting of the activity is towards a trading business.
However, where the business is one which purely allows the occupation of property (whether that is grazing, FHL, or commercial units), the mere running of this in a business-like manner does not guarantee BPR. There has to be significant service provision which offers more than an increased investment return, and after Ross, for FHL businesses at least, this service level needs to be significant indeed.
In some instances, diversified activity is conducted via a different structure, and in light of Farmer/Balfour this may not be the best solution. As such, any businesses in this category should keep their position under review to see whether a restructuring of the activity could be beneficial without jeopardising any existing relief that is available.
This article was originally from Saffery Champness Landed Estates Annual Review 2018. You can view it here.