Mark McLaughlin highlights a case on the distinction between qualifying and non-qualifying business activities for inheritance tax business property relief purposes.
Business property relief (BPR) offers inheritance tax (IHT) relief of 100% or 50% in respect of ‘relevant business property’. For example, BPR at up to 100% is presently available on an unincorporated business interest, or shares in an unquoted trading company.
All or nothing
An unincorporated business interest, and unquoted company shares, are not eligible for BPR if the business consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments (NB these BPR exclusions are subject to limited exceptions, which are not considered here).
This ‘wholly or mainly’ exclusion from BPR is an ‘all or nothing’ test. For example, shares in an unquoted company with activities comprising 51% qualifying trading and 49% investment business may qualify for BPR in full (assuming that these activities are measured accurately). Conversely, the company’s shares would be eligible for no BPR at all if its business activities were 49% trading and 51% investment.
The practical difficulties in the interpretation and application of this test have resulted in a body of case law over the years.
Company shares
For example, in Executors of Keith Denis Lewis Beresford (Deceased) v Revenue and Customs [2024] UKFTT 952 (TC), a company’s main asset was a London property. Four out of six floors were used to provide serviced office facilities. The remainder was used for commercial lettings to tenants as shops and offices. A variety of facilities were available to the serviced office tenants, such as meeting rooms.
When looking at what the company did in the round, the First-tier Tribunal (FTT) found that the nature of most activities was investment management. The advertising of the offices, negotiation of terms, maintenance of office equipment and provision of heating, air conditioning and electricity were all activities which maintained the value of the investment, rather than providing services to particular customers. The FTT concluded that the overall range of activities performed fell on the ‘managing investments’ side of the spectrum. The executors’ BPR claim on the company’s shares was unsuccessful.
Business interest
In Demetriou & Anor v Revenue and Customs [2024] UKFTT 830 (TC), the FTT had to consider whether a wild fishery business consisted of a business of holding investments. Prior to the deceased’s death, she had assisted her husband with the business and took it over on his death in 2003, becoming the river keeper. She continued to run the business until her death in 2020. The business changed from being a stocked fishery to managing and maintaining a wild fishery. This had an adverse impact on the business. The fishery’s income declined. She worked full-time running the wild fishery, even though it was increasingly unprofitable.
Standing back and looking at the business in the round, the FTT concluded that the wild fishery business was mainly one of holding investments. Accordingly, the business was not eligible for BPR.
Practical tip
HMRC admits: ‘The ‘wholly or mainly’ test is not an easy test to apply’ and offers some guidance in its Shares and Assets Valuation Manual at SVM111150. In addition, HMRC’s Inheritance Tax Manual at IHTM25265 advises its officers: ‘When you investigate this you should look at the main activities of the business, and to its assets and sources of income or gains, over a reasonable period preceding the transfer.’ Expert advice is highly recommended.
