The case of HMRC v Executors of the Earl of Balfour  UK UT 300 has recently been heard by the Upper Tribunal. This is a most interesting and valuable case as it analyses the meaning of business property for the purposes of inheritance tax. This was a Scottish case involving Scots law, but there are important elements relating to inheritance tax which of course applies to the whole of the UK.
Lord Balfour had an interest in a farming partnership and was the proprietor of a landed estate comprising approximately 2,000 acres which consisted of two in-hand farms, three let farms, two sets of business premises and 26 let houses. There were also some parks which were let on a seasonal basis.
Lord Balfour made no distinction between the partnership and the estate. His own view seemed to be that everything was run as a single business. The First Tier Tribunal agreed that the whole of the activities represented a single business and that the entirety qualified for business property relief. HMRC appealed to the Upper Tribunal who confirmed the decision in favour of the taxpayer. The First Tier Tribunal had decided that, as a question of fact, Lord Balfour operated a single composite business, and the Upper Tribunal did not feel able to contradict that finding.
I think that some important implications arise from this judgment particularly in connection with the 26 let properties (and possibly other parts of the estate).
It would generally not have been doubted that the passive holding of 26 let properties and the receipt of rent represented an investment activity. The fact that the properties were situated on land on which other (commercial) activities took place does not make them anything other than pure investment properties. Why then did they not represent excepted assets under Section 112 IHTA 1984? An excepted asset is an asset which is neither:
- Used wholly or mainly for the purposes of the business concerned, or
- Required at the time of the transfer for future use in the business.
It would not be difficult to conclude that the 26 let properties did not satisfy these conditions and could therefore be left out of account in calculating the value eligible for business property relief. However, the First Tier Tribunal did not even mention the existence of Section 112 − and neither did the Upper Tribunal on appeal. I suppose if one reaches the conclusion that everything undertaken by Lord Balfour including the ownership of the let properties represented integral parts of a single business, then Section 112 would have no application because they would be assets used wholly or mainly for the purposes of the business concerned.
However, I wonder where this leaves the concept of an excepted asset because if the passive holding of 26 investment properties and the receipt of rents can represent part of an overall business activity, it is difficult to see what could be excluded and treated as an excepted asset. A substantial holding in quoted securities could be such an asset, but what real difference in principle exists between the passive holding of an investment property and the passive holding of a portfolio of quoted securities?
There is perhaps a more helpful analysis. It is well established that when a company carries on a trade and also has some investment assets, one must look at the trading business and the investment business and determine whether the overall businesses carried on by the company are predominantly trading or whether they are wholly or mainly the making or holding of investments. Providing the investment business does not predominate, business property relief applies to the whole of the value of the shares notwithstanding that the investment business may be extremely significant.
It is possible that this reasoning applies to an unincorporated business or businesses in exactly the same way. Could one say that the whole of the activities undertaken by Lord Balfour consisted of one business or a number of different businesses, even though one or more of those businesses were an investment business? If Section 105(3) IHTA 1994 applies equally to a sole trader so that one may aggregate all his businesses including investment businesses and providing the investment business does not predominates, then business property relief is allowed in full.
This would not seem to be the reasoning upon which the Upper Tribunal found for Lord Balfour, but it may well be a reasonable conclusion to be drawn from the judgment. If so, this would be a most helpful development in connection with entitlement to business property relief − unless of course the case goes further.