How does HMRC define Business Relief qualification?
Business Relief, formerly known as Business Property Relief, can be a complicated piece of legislation even for experienced financial advisers.
There are fine lines between investment and non-investment assets. In addition, a client’s assets are only assessed by HMRC for qualification on death.
This makes working with experts critical to increase the likelihood that investments are eligible for Business Relief qualification and full inheritance tax relief can be achieved.
What is Business Relief?
Business Relief (BR) qualifying investments that have been owned for at least two years should be able to be passed to beneficiaries free from inheritance tax (IHT).
IHT planning using BR typically enables assets to obtain relief faster than would be possible through trusts or gifts. Furthermore, a BR qualifying asset is made in the investor’s name, so there is no loss of control over the capital.
The types of businesses that often qualify for Business Relief
Not all investments will qualify for BR, but the relief will often be available for:
- An unincorporated qualifying trading business, or an interest in one, such as a partnership. Qualifying businesses range from those undertaking commercial forestry to residential property development.
- Shares in a qualifying company listed on the Alternative Investment Market (AiM).
In 2013, the UK government made the decision to allow AiM-listed shared to be held within ISAs. This means that investors can also now hold BR-qualifying shares in a tax-efficient ISA wrapper.
The increasing value of Business Relief
BR has been an established piece of IHT legislation since the 1976 Finance Act. Its main purpose was to ensure that when the owner of a family-owned business passed away, the business could survive as a trading entity without having to be sold or broken up to pay an IHT liability.
Over the last 45 years, successive governments have recognised the value of encouraging people to invest in trading businesses regardless of whether they run the business themselves.
Whilst BR is well-established and increasingly used beyond its original purpose, investors should be aware that the value of an investment may decrease as well as increase. Tax rules in this area may also change going forward and the value of a tax relief is dependent on the investor’s individual circumstances.
The fine line of Business Relief qualification
The distinction made by HMRC between investment and non-investment assets is critical for BR qualification and full IHT 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 an increasing number 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 of these cases have been lost by the taxpayer. 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 often 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 substantial services in association with the property.
In many of these cases HMRC and the courts have 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.
A recent case could make qualification more likely
While many cases have failed, a recent Upper Tribunal case of Vigne’s Executors v HMRC does provide another view which could potentially lower the burden of proof.
This case concerned a 30-acre livery business in Buckinghamshire. The late Mrs Vigne died in 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; and
- undertaking a daily check on the general health of each horse.
A more favourable starting point for taxpayers
The Tribunal in this case appeared to question the approach taken in the case of HMRC v Pawson (2013). In this case, 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 shifted the correct statutory test, which was to make no assumption. Instead, the facts should be established and then it should be determined whether they indicate that the business is wholly or mainly trading.
Taking the above into account, the Tribunal accepted the executors’ arguments. They 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 since 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.
How to support clients with an interest in Business Relief
BR can offer a range of benefits for clients. However, recent cases have highlighted how complex an area it is.
Without proper support, advisers and their clients could easily fall foul of regulations and be left with a substantial IHT bill.
The Stellar team are experts at managing services which mitigate IHT and helping clients to protect their legacy. In addition, our Inheritance Tax Services provide opportunities to continue building wealth whilst supporting innovative growth businesses and benefitting from the asset-backed security of the land or property in these businesses.
Click the link below to explore some of our resources that will help you and your clients get to grips with inheritance tax planning and Business Relief qualification.Find out more
Written by Jack Dobinson
Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.
Stellar Asset Management Limited of 20 Chapel Street, Liverpool, L3 9AG is authorised and regulated by the Financial Conduct Authority.