Business property relief – Exempt transfer – Relevant business property – Landowner letting out fields for grazing – Son-in-law managing fields as elderly owner’s mental capacity failed – Landowner’s estate becoming liable to inheritance tax on death – Appellant personal representatives claiming business property relief – Respondent commissioners refusing relief as land part of investment business – Whether land constituting relevant business property – Appeal dismissed
The deceased owned approximately 33 acres of land in Ireland comprising a number of fields. She had a house adjoining the land. One of her two daughters lived with her husband M) next door. The deceased had inherited the land from her husband on his death in 1983. She did not farm the land, but it was let it to local farmers for grazing and was tended by M.
The deceased’s mental capacity began to diminish and, in 1987, she moved in with her daughter and M. After her husband’s death, the deceased had used the services of local land agents to let the fields; a process that M became involved. In 1992, the deceased moved in with her other daughter, where she remained for seven years until her death. M continued to tend the fields and organise their letting through a land agent. The rents were paid into M’s bank account and not to the deceased. M and his wife continued to look after her house.
The fields had been zoned for development use so that, at the time of the deceased’s death, their market value was £5.8m, whereas its agricultural value was only £165,000. The deceased’s personal representatives (the appellants) claimed that the land was “relevant business property” for the purposes of section 105 of the Inheritance Tax Act 1984 so that business property relief was available and the entire value of the land fell outside the charge to inheritance tax. In September 2005, the respondent commissioners determined that the fields were not relevant business property so that only the agricultural value would fall outside the charge to inheritance tax.
A special commissioner dismissed the appellants’ appeal against that determination deciding that, on the facts, the business was wholly or mainly the business of holding investments and the deceased’s estate was not entitled to business property relief ((2008) SPC 268). The appellants’ challenge to that decision was heard at the Court of Appeal.
Held: The appeal was dismissed.
The land was excluded from being relevant business property since the deceased at the date of her death owned a business in which the land was used, which consisted wholly or mainly of the making or holding of investments within the Inheritance Tax Act 1984, section 105(3).
The term “business of holding investments” was not a term of art. The commissioner had concluded correctly that the test to be applied was that of an intelligent businessman who would be concerned with the use to which the asset was being put and the way it was being turned to account. A landowner who derived income from land or a building would be treated as having a business of holding an investment notwithstanding that in order to obtain the income he carried out incidental maintenance and management work, found tenants and granted leases: Weston v Inland Revenue Commissioners [2000] STC 1064 and Cook (Inspector of Taxes) v Medway Housing Society Ltd [1997] STC 90 considered.
There was a spectrum at one end of which was the exploitation of land by granting a tenancy coupled with sufficient activity to make it a business, which might be activity in granting tenancies rather than in relation to the tenancy once granted. At the other end of the spectrum while land was being exploited, the element of services meant that there was a trade such as running a hotel or a shop from premises owned by the trade. It was necessary to decide where a particular business fell within the spectrum which necessarily involved a question of fact and degree. It required a judgment to be made in the light of established facts. Having analysed the evidence and made his findings the special commissioner concluded that the arrangement fell towards the lease end of the spectrum not at the hotel or shop premises end. He was fully entitled to do so on the evidence: George v Inland Revenue Commissioners [2003] EWCA Civ 1763; [2004] STC 147 considered.
Before letting the land the deceased had done the necessary maintenance work of preparing and maintaining fences, watercourses and so forth. She could alternatively have employed a third party to do so, or, she could have attempted to let the grazing of the lands as they stood. The approach adopted affected the return from the land. The work done was aimed at maximising the return from the grazing, which represented income of the deceased by way of a return from the land. The deceased had provided the use of grassland and the grazier took the necessary steps to maximise the value of the grazing by feeding the grass himself. The absence of a full and exclusive right of occupation of the land for the grazier and the existence of a right by the owner to enter the land did not prevent the business being regarded as an investment business. The special commissioner had correctly concluded that the use by the grazier was sufficiently exclusive for the land to be shown to be used as an investment.
The deceased’s business consisted of earning a return from grassland whose real and effective value lay in its grazing potential. The activities regarded as sufficient to lead to the lettings of the land being regarded as a business were all related to enabling that potential value to be released. The special commissioner was fully entitled to conclude that that was not to be viewed as a business of providing grass but rather as a business of holding an investment.
Eileen O’Grady, barrister
