Introduction »

No relief for property business

The availability of Business Property Relief (BPR) for inheritance tax (IHT) is critically important as it potentially saves an individual 40% IHT on death (or for relevant trusts the 6% ten year anniversary charge). However, a key point in securing this valuable relief is that the business (unincorporated or company) must not be ‘wholly or mainly of making or holding investments’. This requires a business to demonstrate that it is either a trading business or at least that the majority of its activities and/or assets are classed as trading rather than investment(s). Two important tax cases on BPR this year have focused on the specific issue of the property business.

The first concerned whether a single dwelling commercially rented out as a furnished holiday letting (FHL) qualified as a trading business. In that case the Upper Tribunal decided that such lettings are essentially investment businesses and therefore no BPR was available. The result being that 40% IHT became due. The second case considered the same question on the commercial letting of a large office building called Zetland House in London.

In the second case the building had been remodelled to provide smaller office units with more facilities and services to tenants to attract occupants particularly from computer, media and high tech businesses. This had resulted in the gross rent and service charges rising to around £2.4m, four times the level received ten years earlier. The building had a restaurant, gym, cycle arch, Wi- Fi, portage, 24 hour access, meeting rooms, media events, outdoor screens for viewing football matches and film shows as well as an art gallery area which therefore required additional staff to run it.

The problem

The HMRC stance in both cases can be summarised using the wording in the judgement from the FHL case ‘that the holding of land in order to obtain an income from it is generally to be characterised as an investment activity’. However, other tax case law exists which considers that there is a spectrum consisting ‘at one end of the exploitation of land by granting a tenancy coupled with sufficient activity to make it a business’ and ‘at the other end … while land is being exploited, the element of services means that there is a trade, such as running a hotel or a shop from premises.’

The lack of clear HMRC guidance over the years as to what activities and/or services are required to constitute a trade explains why there is a growth in these types of cases as both HMRC and taxpayers challenge the boundaries.

The decision

The Tribunal acknowledged that with Zetland House, the business activity was not simply the receipt of rent from let property. Services were being provided and other activities were being undertaken. The question was whether those activities elevated the business from mere ownership or investment into a business which would qualify for BPR. After considering in detail all of the services and facilities at Zetland House the Tribunal noted that the provision of services and facilities to a property business will usually be ancillary to the main investment business and so determined that overall it did not qualify as a business for BPR. This is because the purpose of the activities is largely to improve the building and its fabric and to keep the occupancy rates high. The services provided were mainly of a standard nature aimed at maximising income through the use of short term tenancies.

If this is an area which may affect you please do contact us for further information and guidance.

Introduction »