Landmark decision brings relief for landowners

An estate once owned by former British Prime Minister Arthur Balfour now has a special place in the affections of other traditional landed estates following a ruling by a Scottish tax tribunal this summer.

Balfour’s 1900 acre estate, Whittingehame in East Lothian, had been refused 100 per cent business property relief (BPR) by HMRC, a decision which was overturned at subsequent tax tribunals to the collective relief of similar enterprises.

For BPR to be available, a business has to be predominantly engaged in trading. It is not available to a business wholly or mainly making investments. A rough distinction can be made between trading being active and investment being passive.

BPR effectively spares business owners from Inheritance Tax (IHT) when they transfer holdings to relatives. Under appropriate circumstances farming qualifies as a trade. The letting of property is regarded as an investment activity and does not qualify.

Wittingehame consisted of a farmhouse, two in-hand farms, three let farms acres, parks and woodlands, 26 let houses and cottages, and two business premises.

The nub of the argument was the Balfour Estate’s claim that all its activities, trading and non-trading, were part of one business and qualified for BPR because that business was not wholly or mainly making investments. HMRC reasoned that income derived from letting estate property constituted a separate investment activity and therefore did not qualify for BPR. HMRC lost the argument at a Scottish First Tier Tax Tribunal and again on appeal.

The Upper Tier Tribunal agreed that Lord Balfour “personally and actively managed” the whole of the estate without distinguishing between the farming and letting activities establishing that the estate was run as a single integrated business. Referring to earlier case law known as ‘Farmer’, the Tribunal also confirmed that “in terms of the overall context, turnover, net profit, time spent and capital value, the management of the estate was mainly a trading activity.”

The outcome is highly significant for traditional estate landowners who otherwise may have been faced with huge IHT bills. Not only is it a victory for the mixed estates confirming the ability to claim BPR on otherwise non-qualifying activities which are integrated into a main trading business, it will encourage other businessmen who hold investments including residential or commercial property, to think about structuring their business so as to qualify for BPR.

The Balfour case indicates that BPR can apply to a mixed business although it is likely to be incumbent on that business to establish the balance between investment and trading activities and that it is weighted towards the trading side of things.

It is unclear whether HMRC will further appeal this decision but they are certainly likely to continue challenging individual cases especially as the outcome of each case will depend on whether a business is involved in ‘mainly trading’ or ‘mainly investment’ – mainly active or mainly passive.

So long as this remains open to interpretation, it is important for businesses and their advisers to continually examine the status of their property portfolios to maximise the potential of qualifying for BPR.

In summary, the Balfour case demonstrates the ability of landowners to shelter an element of non-qualifying business activity within a qualifying business, and claim BPR on the whole business. The process opens up considerable tax planning potential but it is not straightforward and will require experienced and professional advice.

Steve Collins is based at Chartered Accountants Francis Clark’s Torbay office and can be contacted on 01803 320100.