IHT Developments (APR and BPR)

Two of the most generous IHT reliefs are Agricultural Property Relief (APR) and Business Property Relief (BPR).

With them each providing up to 100% relief it is perhaps unsurprising that the borders of each tend to be closely monitored by HMRC.  Their challenges often end up in court, giving guidance into the legislation.

One area HMRC are keen to block is making an APR claim on an expensive executive house.  With changes in modern agriculture and common place use of cars for work commuting, houses which were historically farm houses are now often owned by city dwellers with nebulous connections to agriculture.  APR is generally blocked in these cases, because of the need for the dwelling to be used for agriculture and be of an appropriate ‘character’ in relation to the farming operation.

Historically, HMRC have argued that this nexus between the house and land requires common use and ownership.  In a recent case (Hanson) the Tribunal held that this was not the case.  Agricultural use was required, along with appropriate character for the relevant farming operation, but not necessarily common ownership.  This conclusion may prove very useful, especially in certain farming situations where different generations of a farming family may have different interests.  Often these evolve over time, without the parties necessarily taking the advice at each stage.

In another recent case (Zetland) the Tribunal found that no BPR was due, because the business was mainly one of dealing in land or the making or holding of investments.  Interestingly, the judgement does not seem to imply that the activities in managing commercial property were not a ‘business’.  The problem was rather that the nature of that business caused a disallowance of BPR.

As ever, understanding the consequences of dealing with valuable assets is important – even if it may mean paying for professional advice!

Holiday Letting Business Does Not Qualify for Business Property Relief

CRC v Lockyer and Robertson (as the personal representatives of N Pawson, deceased) – Business Property Relief

HMRC have successfully appealed the landmark Business Property Relief case of N Pawson deceased which, if it is upheld at the Court of Appeal, is likely to have a significant on the potential Inheritance Tax liabilities of individuals with a holiday letting business.

HMRC success in this case is perhaps not as surprising as the fact they originally lost at Tribunal.  The judge gives some extra useful guidance on the distinction between active trading and property letting.

The First-tier Tribunal initially ruled that as long as additional services were provided in conjunction with a holiday let then the  business property relief (BPR) would be available and therefore obtain relief from Inheritance Tax (IHT) at 100%.

HMRC subsequently appealed the above ruling.

The Upper Tribunal Judge focused on “the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity”.

He said that a property could be managed actively and still be retained as an investment.

The services provided to clients, such as cleaning, providing a welcome pack, and being on call to deal with queries and problems, were unlikely to be significant or sufficient to stop the business from being “mainly one of property investment”.

These services all enhanced the capital value of the property and made it possible to obtain a regular income from its letting.

The judge concluded the First-tier Tribunal should have found that “the business… did indeed remain one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property”.

He did not accept the taxpayer’s argument that the innate character of a holiday letting business rendered it outside the scope of a normal property letting business. Rather, it was a typical example of a property letting business.

As a result business property relief was disallowed and the letting operation fully charged to IHT.