Qualifying for Business Property Relief

Business property relief (BPR) from inheritance tax (IHT) can reduce the value of an asset for IHT purposes by 100%. Two recent cases have considered the relief; one provides reassurance and the other a potential opportunity. 

Reassurance: farming and property letting

If long term property letting (which is considered "investment" activity for BPR purposes) represents a dominant proportion of an estate that comprises (say) farming activity (which is considered a "trading" activity for BPR purposes) no BPR at all may be available in respect of the estate. This is particularly significant now that many estate owners are looking to diversify traditional farming activities to include letting activity as part of their portfolio.

In the recent case of Balfour*, one of the issues that the tribunal was asked to consider was whether the late Lord Earl of Balfour's farming and estate management business qualified for BPR. The business comprised not only traditional farming activities, but also consisted of letting three farms and twenty-six houses and cottages. There was therefore a significant 'investment' element to the business.

In considering whether the business was "wholly or mainly" a trading business (and so qualified for BPR) or an investment business (which would not), the tribunal confirmed the importance of considering the business "in the round" and, on that basis, formed a view as to the relative significance of the investment and non-investment activities. The relevant factors considered included turnover, profitability of the various activities, activities carried out by employees and time spent, the acreage used by the businesses, and the capital value of the assets. In this case, the tax-payer won and trustees and estate owners can be encouraged by the clarity the case provides. However, it is a reminder (if one were needed) that the position should be kept under review (perhaps as a standing item at a trustees' meeting) so that changes to the business activity, relative asset values and the current approach of HMRC are taken into account.

Opportunity: Gifts of specific business assets that qualify for BPR

In the Nelson Dance case**, a farmer transferred to a family trust agricultural land which formed part of his farming business and which had development value. In the view of HMRC, the land was a gift of a specific business asset and so BPR was not available. This was on the basis that, for BPR to apply, the legislation required a person to give away their entire business (or an interest in that business). It should be said that this view of HMRC was one held by a number of leading practitioners. The Court of Appeal rejected HMRC's argument and found in favour of the taxpayer.

The authority means that business owners do not need to give away their entire business (or an interest in a business) in order to secure BPR on lifetime gifts of business assets. This ability to secure BPR on gifts of specific business assets will be of particular interest to business owners who may want to continue in business whilst, at the same time, taking steps to give away specific assets in the most tax-efficient manner possible.

The Nelson Dance case is an important decision for owners of business property. Having said that, the government is currently undertaking a review of the way in which IHT is assessed and the reliefs that apply. With that in mind, anyone considering making gifts of business property in the near future should consider whether now might be the right time to do so.

Jonathan Riley is Head of Succession, Estate Planning & Tax at Michelmores. For further information, please contact Jonathan at jonathan.riley@michelmores.com

* HMRC v Brander 2001 [UKUT] 300 (TCC)
** HMRC v Trustees of the Nelson Dance Family Settlement 2009 EWHC 71 (Ch)