Is a business like the “tax elephant” – you know what it looks like but it is difficult to describe? Or does it change with the circumstances of when and how the business is looked at? There is no doubt that the definition of a business is uncertain.
Business Property Relief for Inheritance Tax
Business Property Relief (BPR) for Inheritance Tax (IHT) can command substantial tax savings and if the question of “what a business is” is possibly in doubt then there are some complex considerations for tax advisers, not least how they help their clients and protect themselves from professional indemnity claims.
Is it fair on the family tax adviser, and even question if it is fair to HM Revenue & Customs (HMRC), to work in such a climate of uncertainty with possible substantial costs to prove the position? Or is this tax environment enjoyed by both the adviser and HMRC – scope for debate?
Recent Cases to Test the Boundaries
There have been a number of recent tax cases where BPR and the overall trading activity of a business have been tested. Do they help the tax adviser or make everything more complex?
A Judge (Lord Diplock) warned in Town Investments v Department of the Environment  AER 813, that the meaning of business changes like an etymological chameleon to suit the context where it is found.
Perhaps an example of this is Ninth Marquis of Hertford v IR Comm’rs  STC (SCD) 177, where the entirety of an historic house qualified for BPR, including a part privately occupied and not open to the public because the entirety of the house provided backdrop for the business.
Perhaps the area currently causing the most confusion is around the interpretation of IHTA 1984, s 105(3):
“A business or interest in a business, or shares in or securities of a company, are not relevant business property if the business or, as the case may be, the business carried on by the company consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stock or shares, land or buildings or making or holding of investments.”
Factors to Consider
What factors will HMRC look at to help decide whether or not the business consists wholly or mainly of holding investments?
- • The capital employed
• The balance sheet allocation
• The turnover
• The profitability (enterprise accounts)
• The time spent by partners/employees
HMRC will consider how much of each of the above is attributable to the trading element of the business and how much to the investment element of the business. In addition, the factors of history and location of the whole business will be taken into consideration.
Perhaps we have all the definition of a business that tax advisers need to try and achieve the best result for the client but how certain does that leave worried taxpayers at the planning stage and worried beneficiaries when they look at the results of deciding whether there was a business or not?
Chapter 24 of HMRC’s IHT Manual has helped define agriculture for agricultural property relief – do we need greater guidance on business for BPR – both with regard to the activity and the starting point?
By Julie Butler