Julie Butler highlights some topical issues for business owners in terms of possible claims for 'Business Property Relief' for Inheritance Tax purposes.
Does the Balfour case direct more protection with regard to Inheritance Tax (IHT) relief for the mixed farming Estate or less? The judgement of the Earl of Balfour case was delivered in early May 2009. The case recorded a successful Business Property relief (BPR) claim for a mixed agricultural Estate in Scotland.
The Special Commissioners ruled that the business in question was not “wholly or mainly making or holding investments” under the interpretation of IHTA 1984 s.105 (3).
This is seen as great news for the farming world and it is considered that the case strengthens the decisions of Farmer and George. However, does this now create an over optimistic approach? It is noted that HMRC are planning to appeal against Balfour.
Failure to Achieve BPR is Absolute – So What Protection is There?
For all those advisors of mixed agricultural estates who are taking comfort from this case, there are arguments to support that they should consider actually taking more protective action around IHT safeguards now than before the decision. The only time the “investment business” question is actually tested is death. Failure to achieve BPR is absolute.
The Balfour case shows that the landowner can shelter a lot of what might be considered to be non-qualifying business activity within a qualifying business, and potentially claim BPR on the whole business.
By integrating the non-qualifying property within the overall Estate, everything qualified for BPR in the Balfour case but will this be so in every case?
Integration of Non-Qualifying Activity
For the mixed Estate, how far can this integration of non-qualifying property go in order to protect the non-qualifying elements, and how much non-qualifying activity can be included? In the Balfour case the property letting side was a major part of the Estate, bringing in nearly half the total turnover of the Estate.
But how far can this integration extend? Another key point arising from the case is the strength of involvement by the deceased in managing the business to help with IHT relief.
The Joint Impact of Balfour and Dance
The removal of the surplus investment assets has been considered by many to be “franked” by the successful 2009 Nelson Dance case.
In this case the Special Commissioner held that when considering a BPR claim what mattered was the loss in value to the transferor’s estate and what that the loss to the estate was attributable to what left the estate not what the transferee received, i.e. the transfer of non-business assets can qualify for BPR.
Removing Non-Trading Assets Surplus to Requirements
On the basis that the Balfour case gives hope for the mixed estate, is the answer to remove the surplus non-trading assets following the ruling in Dance and then create a robust “overall, mainly a trading activity”? It was essential to establish what the ‘preponderance of business activity was’, i.e. the main business must be farming, there can be relief for some let property but not too many.
Clearly, there is a risk of actively sheltering too many non-qualifying business assets within a mixed estate and claiming BPR thereon, and then experiencing “absolute” failure, i.e. on death if there are too many let properties, there is a concern – is the whole estate being classed as an Investment Business and, therefore, LOSING IHT RELIEF? A safe balance has to be the way forward.