Inheritance tax and availability of business property relief

Business property relief (BPR) is an important and valuable inheritance tax (IHT) relief that can reduce the value of relevant business property when it is transferred either in life or death. If available, BPR can reduce the taxable value of the transfer by 50% or 100%, depending on the type of property transferred.

Assets that qualify for 100% BPR are shares in an unlisted company, a sole trader business or share in a partnership and shares listed on AIM. 50% relief is available on shares in a quoted company in which the individual has voting control and land, buildings or plant and machinery owned by the individual and used in their partnership or a company that they control.

In all cases the individual must have owned the asset for 2 years and most fundamentally the business must be classified as a trading rather than an investment business. Two recent first-tier Tax Tribunal decisions have addressed the question of whether a business is classified as an investment or trading one, with somewhat contradictory outcomes.

Ross v HMRC [2017] UKFTT 507 concerned a furnished holiday let business. Eight holiday cottages in Cornwall were let as self-catering units. They were adjacent to a hotel which the deceased had previously owned. The guests from these units could take advantage of some of the hotel’s amenities such as ordering bar snacks and taking breakfast. Various other additional services were offered, such as a mid-week clean and change of bed linen. The executors of the estate argued that the provision of all these extras changed the character of the business from being one which was mainly an investment in land to one providing a holiday experience, and that the investment in land was a subordinate part, therefore the business qualified for business relief. However, the Tribunal did not agree. While they accepted the level of services was more extensive than those provided in other furnished holiday let businesses where business relief was denied, they concluded the essence of the activity remained the exploitation of land in return for rent.

Buoyed by their success in the Ross case, HMRC made it clear that they would look to deny business relief for all businesses where exploiting the ownership of land is a major factor.

The subsequent decision therefore in Vigne v HMRC [2017] UKFTT 632 came as unpleasant surprise to HMRC. This case concerned a livery stable business on a large piece of land. The personal representatives of Mrs Vigne argued that her business was significantly more than merely letting or licensing the land for use by the horse owners as she provided valuable additional services, such as health checks of the horses, providing them with hay and worming products, and removing manure from the fields. In this case the Tribunal accepted the argument and concluded that “no properly informed observer could have said that the deceased was in the business of just holding investments”. Rather than starting with the assumption that a business based on a holding of property is one of making or holding investments, and working out whether any factors have changed that view, the correct approach is to establish the facts before determining whether the business is as such.

The decision on the face of it is good news for taxpayers but the clear difference of approach between Ross and Vigne urgently requires clarification. It will come as no surprise therefore that HMRC have lodged an appeal against the Vigne decision.

If you require any advice regarding IHT planning and the availability of BPR please contact Liz Hooley.