Trade, you win, investment, you lose…

Inheritance Tax (“IHT”) at a rate of 40% is usually charged on the death of an individual although it is sometimes charged at other times, for example, on the tenth anniversary of certain types of trust.

If the assets which are being charged to IHT consist of qualifying business property, Business Property Relief (“BPR”) is often available against the IHT charge, in most cases at a rate of 100% meaning the assets can be fully exempt from IHT. It is therefore essential that where there are assets which could qualify for BPR that individuals or trustees do all they can to make sure they tick the relevant boxes to stand the best chance of securing this very generous relief.

One of the main conditions for a BPR claim is that the business does not consist “wholly or mainly of making or holding investments”. Usually, owners of “mixed” businesses that carry out both trading and investment activities have a very difficult task in trying to structure their businesses with a view to securing BPR. Cases of dispute with HMRC typically involve businesses like caravan parks where there is the trading activity of providing a shop, leisure facilities and services to park users which is then combined with the receipt of rents from the caravan “pitches”. What is the main or dominant business activity in such cases? It depends on who you ask, but you can see why cases like this usually present problems.

There is a substantial amount of information about BPR available on the internet and plenty of guides and/or articles which explain the wholly or mainly test in substantial detail. Rather than write at length here, I think it is safe to say that if anyone wanted to see how the BPR rules are applied in practice, they could do no harm in looking at the recent case of the Trustees of the Zetland Settlement v HMRC (2013) WTLR1065 (“Zetland”). This was a trust case involving a managed and serviced office building with “services” such as a café and gym being provided to “users” of the building. Predictably, HMRC denied BPR stating that all of the “services” were with a view to making the office building more attractive and with a view to maximise rents. In other words, the activity in Zetland was of letting property which is an investment rather than trading activity. HMRC won the case and BPR was denied.

One good thing that came out of Zetland was the criticism of HMRC’s approach to cases involving property businesses. HMRC suggested that the starting point would be that they assume that BPR is not available. In other words, it is for the taxpayer to convince HMRC that BPR should be allowed. HMRC were told, in no uncertain terms by the Tribunal, to look at matters fairly and in the round and not to make any assumptions at the outset when a claim for BPR is made.

Individuals with businesses which hold cash reserves, property or other substantial assets need to take advice at an early stage to make sure that they are not prejudicing the availability of BPR. If the relief was not as generous as it is I could understand it being ignored as widely as it is but how often do HMRC offer a 100% tax relief?

We have an experienced team who regularly advise on IHT and BPR issues and we’d be happy to help anyone who has a query about such matters. 


Please contact us on 01756 793 333 and ask to speak to a member of the private client department.

Liam O’Neill
Partner, Wills, Trusts and Probate

*This blog has been prepared by AWB Charlesworth LLP  as an overview of the legislation and does not constitute advice on any specific matter.  You should not take any action in relation to it without taking detailed legal advice.