Relief At Tax Tribunal Decision For Business
August 8th, 2009
A recent case relating to Business Property Relief (BPR) brought by the executors of the Fourth Earl of Balfour against HMRC helps clarify the position on relief from inheritance tax for diversified rural businesses.“Whilst government policy has actively encouraged farmers to add other income streams to their core business’ doing so could prejudice future eligibility for BPR,” warns Simon Dixon Smith of Savills in Chelmsford.Generally a farm or estate with an in-hand trading element may qualify for BPR, which reduces the tax payable at death on the market value of the business and its assets by 50% or 100%. This relief is not available where the business consists ‘wholly or mainly… of making or holding investments’ (s105(3) IHTA 1984).Following the case of Farmer v IRC 1999 it became clear that an element of investment activity was acceptable provided however that the trading activity dominated. Certain indicators proving this to be the case were required including capital used, turnover and profit generated, employee and management time spent and the historical connection between the properties.In the case of the Fourth Earl of Balfour, the Revenue disputed the claim for BPR on a number of grounds. The Tax Tribunal had to consider whether the estate was run as a single business for the requisite period (two years) and whether the investment activity dominated.The Whittingehame Estate, home of the Fourth Earl of Balfour, comprised 1907 acres including 665 acres farmed in-hand, 917 acres let out and 308 acres of woods and parkland. There were also 26 houses and cottages and two commercial premises.The Tribunal chair decided that the business was run as a whole despite separate bank accounts and VAT registrations for the ‘farm’ and ‘estate’ elements. One person had overall control and the accounting separation did not impact on day-to-day management.Overall the in-hand farming enterprise turned over more than the investment activities and the balance of time spent was on the farms. The residential components were considered ‘an important part of the overall business’ and had a strong historical association with the estate. The cottages for example were let to tenants who might be able to benefit the estate. The owner’s business skills were required for all parts of the business.The Tribunal chair considered where ‘the preponderance of business activity’ lay and concluded that the letting activity was ancillary to the rest of the business. He did not consider an analytical approach appropriate, rather it was ‘a matter of more general assessment and impression as to where the preponderance of business activity lies’.This decision may yet be appealed by HMRC but advice to landowners must be to deal with all parts of the business in a commercial way for the benefit of the business as a whole, whilst seeking to ensure that agricultural activities dominate.HMRC is constantly seeking to tighten the criteria for the consideration of relief from inheritance tax. This case helps to redress the balance and to show that a prescriptive test for the availability of relief is not appropriate”.