Business Relief and how HMRC defines Business Relief qualification
Business Relief (formerly called Business Property Relief) can be a complicated piece of legislation to understand, even for the most experienced tax advisers.
One of the biggest issues is that assets are only assessed by HMRC for qualification on death, meaning that you can’t guarantee qualification during your life.
HMRC draws a fine line drawn between investment and non-investment assets and this is critical for qualifying for Business Relief (BR) and thus securing full inheritance tax relief.
Section 105(3) of the Inheritance Tax Act 1984 provides that BR is effectively lost where a company is found to be wholly or mainly operating as an ‘investment company’.
In recent years there has been a raft of cases that have considered the question of what is necessary to prove that a business is trading, and therefore qualifies for BR, rather than operating as an investment company.
Many such cases have been lost by the taxpayer and there seems to have been a gradual raising of the bar in terms of the hurdles that have to be overcome in order to qualify for BR.
HMRC’s view is generally that some businesses are simply the exploitation of the underlying land and property, which does not amount to a trade. Anyone wishing to claim BR has to demonstrate the provision of very substantial services in association with the property.
The Tribunal in many of these cases has started from the presumption that a land-based business should be viewed as an investment business with the onus falling on the taxpayer to prove otherwise.
But while many such cases failed, the recent Upper Tribunal case of Vigne’s Executors v HMRC does provide another view, potentially lowering the burden of proof.
The Vigne Case
This case concerned a 30 acre livery business in Buckinghamshire. The late Mrs Vigne died on 29 May 2012 and her executors submitted an IHT return that included a claim for BR on the full value of her livery business.
HMRC argued that the claim for BR should be disallowed because the deceased’s livery business comprised nothing more than a landowner letting or licencing her land for the use of others (the horse owners), with the result that it could be characterised as an investment company.
Mrs Vigne’s executors argued that HMRC’s analysis was incorrect on the basis that the deceased’s livery business offered significantly more than a simple right to occupy parcels of land. Instead, the livery business also offered valuable services for the benefit of horse-owners such as:
- the provision of worming products, including administering them on a quarterly basis;
- providing horses with feed during the winter months, when the grass might not provide sufficient food removing horse manure from the fields; and
- undertaking a daily check on the general health of each horse.
The Tribunal in this case appeared to question the approach taken in the case of HMRC v Pawson (2013) in which the judge had suggested that the correct approach was to start with the idea that a business is one of making or holding investments and then to look for factors that might alter that preliminary view.
In the Vigne case, the Tribunal considered that this approach transposed the correct statutory test, which was to make no assumption whatsoever and instead establish the facts and then determine whether, taken together, they indicate that the business is wholly or mainly trading.
Taking the above into account, the Tribunal accepted the executors’ arguments and found that no properly informed observer could have said that Mrs Vigne was in the business of ‘holding investments’ and the level of services offered were ‘incompatible with the business of holding investments’.
HMRC lost the case at the First Tier Tribunal in 2017 and its appeal has now been rejected by the Upper Tribunal.
The importance of this is that, in dealing with the case, the Upper Tribunal made it clear that it is not necessary to apply the presumption previously applied, that a land-based business should automatically be viewed as an investment business. This provides a more favourable starting point for the taxpayer.
The Ross Case
The Vigne case covers similar considerations to those that can be found in another recent case, the Executors of Marjorie Ross deceased v HMRC (2017), which focussed on the level of services needed for a furnished holiday letting (‘FHL’) business to qualify for BR.
In that case Mrs Ross had an interest in a partnership (known as the Green Door Cottages Partnership) which owned eight holiday cottages, two flats in Cornwall and a separate property in Dorset.
In exchange for a fee of 14% of the partnership’s annual turnover, a local hotel in Cornwall agreed to provide services to guests of the furnished holiday lets. These services included;
- administration (including handling bookings);
- personal guest services (e.g. turning up heating, accepting left luggage and answering queries);
- food services (delivery of bar meals and discounts on bar meals in the hotel); and
- ordering milk and newspapers.
The executors argued that the business provided services ‘more akin to a hotel’ and as a result should qualify for BR.
HMRC accepted that the level of services being provided was higher than in other FHL cases, but still rejected the claim for BR, because what was ‘really being provided is land, or the right to rent land in a particularly attractive location in Cornwall and that is the main reason why people stay at these properties’.
The Ross case is the latest in a string of FHL cases (including Pawson and Green) that have gone against the taxpayer and it is very hard to see what more FHL owners could possibly do for holidaymakers in terms of providing additional services in order to qualify for BR.