When is a family business essentially an investment, so putting it outside inheritance tax business relief?
That was the question being decided during a fascinating two-day tribunal hearing in mid-February in deepest South-west England.
Our clients were arguing that the family holiday business, which included self-catering units, qualified for inheritance tax business relief on their mother’s death, despite HMRC’s assertion that it was an investment and so ineligible for relief.
After their father’s death, a few years earlier, one of the daughters had moved to help mother run the business, and she continued to run it for several years after mother too had died. She, heroically and most efficiently, ran the whole appeal to the tribunal herself. The family’s accountant and another local businessman, who had known both parents well, gave supporting evidence and I was there to offer a few pointers on the legal authorities.
We expect to see the written judgment soon.
Many tax practitioners deal with holiday lettings in the context of income tax and Capital Gains Tax (CGT). Provided the business meets the threshold for minimum weeks available for letting and actually let, it is taxed as if it was a trade. For example, the profits can support pension contributions, and disposal of the business is eligible for CGT entrepreneurs’ relief.
Logically, one would expect similar rules to apply to Inheritance Tax (IHT) business relief, perhaps subject to a threshold such as satisfying the income tax rules for at least five of the seven years before any transfer of value.
But we do not have a ‘joined-up’ tax system. While most sole trader or partnership businesses get 100% relief from IHT, investment businesses do not (Section 105(3) of the 1984 IHT Act) and HMRC seems determined to argue that holiday lettings are, invariably, investments.
Since Mr Justice Henderson’s 2013 judgment in HMRC v Pawson’s Executors, most reported cases seem to have gone in favour of HMRC. The judge said he regarded holiday lets to be "a typical example of a property letting business, albeit one of a fairly specialist nature."
Since Pawson, I have seen many claims for IHT relief for businesses in which farmers have diversified from agriculture; as well as holiday lettings, these included livery stables and storage activities. HMRC seem, in every case, to have asserted that, because these activities use land, they must be mainly investment. They follow another comment of the Pawson judge that additional services and facilities are "unlikely to be material because they will not be enough to prevent the business remaining mainly one of property investment."
However the Court of Appeal (in George) had accepted the view of the Special Commissioner that land-based businesses cover a “wide spectrum” of both investment and non-investment businesses.
I do not believe the Pawson judge was right to switch from the Court of Appeal’s “wide spectrum” to his ‘starting-point’.
I was pleased to find, when the First Tier Tribunal published a recent decision in another case (Vigne’s Executors v HMRC), that I am not alone.
The Vigne judgment says the assessment of whether or not a business is an investment business "must include such things as the subjective intention of the landowner, any manifestations on the part of the landowner as to whether the relevant land is being held purely as a long or medium term investment and what, if any, components of business activity existed."
On Pawson, it says: "The essential question requires us to begin by asking the simple question: was the deceased carrying on a business, wholly or mainly, of holding investments."
Vigne reminds us that most of the cases on what is and is not investment should turn on what a reasonable business owner would think.
In my view we cannot say that a holiday lettings business is or is not an investment business, any more than we can say that a storage business or equine livery is or is not investment. They all depend on their specific facts, not on a generic description of the kind of business.
This is why I am hopeful that the written judgment from the tribunal hearing I attended in February will confirm that the business was not mainly investment and so qualifies for relief from Inheritance Tax.
Published: 22 March 2018
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