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The Investment Line - The Pitfalls


Julie Butler - Expert Author

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5 December 2013

One of HMRC’s current approaches to collect more Inheritance Tax (IHT) is to reclassify a trading business as an investment business, eg Pawson, McCall, Zetland etc.

HMRC may contest a claim to BPR on the grounds that:

a)      Activities do not amount to a trading business, and/or

b)      Even if such activities amount to a business, it consists wholly or mainly of making or holding investments.

The Importance of defining a business

The negative approach

In the reversed decision on the tax case HMRC v Personal Representatives of Nicolette Pawson [2013] UKUT 50 (TCC), I note that in coming to his conclusion, Lord Justice Briggs agreed the following:

-       That, in relation to land based businesses, there was a ‘spectrum’ at one end of which were businesses (such as hotels) where large numbers of services were provided in addition to the simple use of the land and which qualified for BPR, and those at the other end where no additional services were provided, which did not (such as ordinary property lets).

-       That there was no presumption that a land based business was an ‘investment’ business for BPR purposes and that in each case a decision had to be made as to where on the spectrum the business lay.

IHT Manual Paragraph IHTM 25051 helps provide guidance – “Valuing businesses and partnerships: What is a business?”

The meaning of “business” is not defined for IHT purposes, so it has its ordinary meaning which is a trade or profession carried on for gain. IHTA 1984/s103(3) says that businesses “includes a business carried on in the exercise of a profession or vocation, but does not include a business carried on otherwise than for gain”. The effect of this is to exclude “hobby businesses”.

Pawson v HMRC (2012) UK FTT 51 and HMRC v Pawson (2013) UKUT 50. The First-tier Tribunal held that the deceased’s letting of holiday accommodation was a business, applying business tests laid down in McCall (2009) STC 990, at p.1000. However, this was overturned by the Upper Tier Tribunal.

BPR is a percentage of the value of “Relevant Business Property”.

What is Relevant Business Property (RBP)?

For unincorporated businesses (sole traders and partnerships, as is the case with most farming businesses) the most important categories of Relevant Business Property are:

a)      A business or an interest in a business (eg a share in a partnership) (s.105(1)(a) IHT Act 1984) Rate of Relief 100%

b)      Land or buildings or machinery or plant used wholly or mainly for the purposes of a company controlled by the transferor or a partnership of which he was a partner (s.105(1)(d) IHT Act 1984) Rate of Relief 50%

A business which consists wholly or mainly of making or holding investments is not Relevant Business Property (s.105(3) IHT Act 1984). HMRC have been trying to argue that many businesses fall over the “investment line” and do not qualify as RBP.

HMRC will try and attack property used in a partnership that is not partnership property and therefore they will restrict BPR to 50%. However, denying BPR because the operation has “crossed the investment line” is a 100% IHT relief prize not just 50%! As a result, all the BPR on the genuine trading element can be lost with this attack on business on the overall business status.

A Balfour failure

Imagine the calamity if Balfour had failed – a “Balfour failure”. This is the reason why tests are carried out to check the business element and hence why many businesses conduct the exercise “The Balfour matrix”. HMRC look at the business structure, income, profits, capital values over a period and try to prove the operation is not a “Balfour failure”, ie it has not passed the “investment line” WHILST THE TAXPAYER IS STILL ALIVE.

What are the areas of attack by HMRC?

Obvious areas of attack by HMRC are the farming operation and the landed estate where the investment activity has overtaken the trading activity. Examples here would be Farmer and Balfour respectively as cases that HMRC have taken to Tribunal. In the holiday industry it is one where there was a large amount of letting and not so much services provided. Obviously the example here is Pawson. Also the office accommodation operation with a mix of trading and non-trading activities, some degree of services and the examples of Tribunals here are Zetland and Ramsay. Ramsay UK UT 0226 is a capital gains tax case, it was a success for the taxpayer arguing that the amount of services provided did create a trading business and is something those wanting to achieve Business Property Relief for their clients should consider as part of the accumulation of details.

The theme throughout such reviews by HMRC is what are the indications of business, the badges of trade, all the points that are known for there to be a serious business seriously undertaken. There are elements of the farming operation that can be deemed to be an investment not a trade and a Grazing Agreement has been looked at in length through McCall and the services provided but these must be considered at length.

Horse liveries

Another area of attack is that the trade of horse liveries where licences are given to customers with horses. For anybody involved in this area of business it is well known that such an activity is hard work and an intelligent businessman would see this as a trading operation. Various matters must be looked at, eg are there trading accounts prepared? Has HMRC accepted at an income tax return and was there Class 4 National Insurance paid on this operation but it is really sub issues to what was really going on on the ground of the trade? What are the facts? Is it an activity conducted in a regular manner on a sound and recognised business principle? Is it principally concerned with making supplies? For example, where there are a large number of liveries, they change all the time, the proprietor has to market for such liveries.

One point that has come through from the tribunals is that HMRC must not automatically assume that something is not a business but that is still not going to satisfy the HMRC type to deny that the operation is a trade. Using the example of DIY liveries there might be a licence for each horse but the activity is a serious undertaking earnestly pursued, a serious occupation, there is reasonable and recognisable continuity. In the view of an “intelligent businessman” this is a trading business.

A portfolio of evidence

There is no doubt that the taxpayer will need a portfolio of evidence to show what side of the investment line the business falls on and how to beat HMRC in their aggressive, fairly unpleasant attack on genuine businesses trading and operating well into the old age (of the proprietor and taxpayer). Obviously it is essential that the portfolio of evidence is obtained now. To repeat the well known phrase “your best witness will be dead”, we are dealing with a “silent witness” and therefore the evidence must be obtained while the taxpayer can stand witness to how hard they work, how many hours a week, what it takes to control the areas of the business etc.

All businesses should ensure that such evidence is on file now. These should be the notes of the hours worked of every business that comes close to the “investment line”. There is some detailed information to hold on file but regular information to obtain. There are going to be some bulging pre-prepared permanent files supporting inheritance tax claims in the future because, if not, HMRC could deny tax relief where genuine relief is due and that appears to be HMRC’s approach at the moment.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email;, Website;

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).

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Article Published/Sorted/Amended on Scopulus 2014-06-02 09:04:27 in Tax Articles

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