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HMRC loses Inheritance Tax ‘Business Relief’ appeal

A landmark Inheritance Tax (IHT) case has ruled against HMRC after it took an appeal to the upper tribunal. This story starts with a livery field, where horse owners pay to keep their horses, and the denial of Business Relief when calculating IHT when the business owner passed away.

First, what’s Business Relief?

Business Relief, previously known as, and sometimes still referred to as, Business Property Relief, is an IHT relief available for transferring ownership of a business and its assets. It can be used during a person’s lifetime or when they die. Originally intended to stop small businesses having to be sold or broken up, the business or asset must have been held for at least two years.

You’re able to claim 100% Business Relief on;

  • A business or interest in a business
  • Shares in an unlisted company

50% relief is available on;

  • Shares controlling more than 50% of the voting rights in a listed company
  • Land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
  • Land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Business Relief isn’t available in all situations; not-for-profit organisations, for example, don’t qualify.  Neither does a business or interest in a business that primarily deals in securities, stocks or shares, land or buildings or in making or holding investments. Therefore, a business solely generating investment income, like commercial or residential lettings, do not qualify.

A business’ land, depending on the nature of the business and services provided, is historically where there has been debate. Rules state that “any land or building, machinery or plant which was used wholly or mainly for the purposes of a business” is defined as relevant business property, and therefore attracts relief. However, this definition is open to interpretation.

The livery case

Typically, cases that go to court debating the use of land as an investment go in favour of HMRC. However, the ruling in the case of “The Estate of Maureen W. Vigne (deceased) v. HMRC”, subsequently upheld after a lengthy appeal process, set a new precedent.

Mrs Vigne’s 30 acres livery business only made a modest profit. HMRC, therefore, took the view that that land wasn’t “wholly or mainly” for the livery and was, in fact, an investment. This meant it would not qualify for Business Relief.

But, whilst the livery did operate, it required additional labour and there were intentions to expand. Critically in the case, they also offered some minor services, including;

  • The provision and administering of worming medication
  • Feeding hay in the winter, grown on adjacent land
  • Removing manure from the field
  • A regular health check

The first-tier tax tribunal and since upper-tier tribunal, both decided a business was being carried out, placing considerable emphasis on the fact that Mrs Vigne was clearly doing more than letting out land held as an investment.

The first-tier tribunal noted that; “The first observation is that this does not require a consideration of whether any identified services or business activity contribute more to the income generated and/or profitability than the ability of a third party to occupy any part of the land. The central issue is whether the ‘business’ is mainly one of holding investments. We do not dissent from the view that looking at the proportion of income derived from the use and occupation of land, as opposed to the provision of services, is irrelevant any more than it is irrelevant to consider the reality of what takes place on and in association with the land. In our judgement that reality is the provision of enhanced livery, albeit stopping short of part livery (as defined by Mr Vigne), but nonetheless providing a level of valuable services to the various horse owners, which prevents it being properly asserted that the business was mainly one of holding investments.”

Fundamentally, the additional services provided distinguished it from competitors who simply rented the land out. Those services were also one of the primary reasons customers used that particular livery, meaning by definition it was run as a business with a unique selling point.

Why the final, upper-tier tribunal ruling is so significant

At the final appeal stage, judges disagreed with HMRC’s barrister, Christopher McNall, that the livery was an investment in land. Significantly, stating that: “Mr McNall’s arguments appeared to be based on a submission that any business involving exploitation of land should, as a matter of law, be assumed to be wholly or mainly a business of ‘investment’ unless the taxpayer could establish otherwise.”

This case challenged and overruled that default stance, meaning HMRC cannot simply start with the assumption that business land is an investment, not qualifying for relief.

Ruling Judge Geraint Jones explained: “It is not correct to start with the preconceived idea that in any given situation…

“The proper starting point is to make no assumption one way or the other, but to establish the facts and then to determine whether, taken together, they indicate that the business is wholly or mainly one of holding investments.”

This ruling will affect other land-based business too, such as campsites, for example. But, fundamentally, the ruling states: “There is no clear bright line between businesses which qualify for the relief and those that do not.”

The decision offers new confidence to business owners considering their Inheritance Tax planning opportunities. If you or your clients would like to discuss how the use of Business Relief may impact their personal circumstances, don’t hesitate to get in touch.

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