A new decision of the Special Commissioners should be studied by advisers to Scottish landed estates

Scottish landed estates are advised to look at their inheritance tax planning in the wake of a recent decision of the Special Commissioners, Brander (Representative of the late 4th Earl of Balfour) v HMRC.

The Whittingehame estate in East Lothian has fought off a strong challenge by the Revenue to its claim for business property relief on the whole estate, a mix of an inhand farming operation, let farms, woodlands – and a significant number of let cottages.

To attract the relief (Inheritance Tax Act 1984, s 105), a business must be not wholly or mainly one of making investments – which is how HMRC normally regard a landlord receiving rents. What had to be shown in this case was that the estate operated as a single business in which the trading (farming) activities were predominant.

Ian Clark of Turcan Connell, who acted for the estate, that of the late Lord Balfour, says the case develops a previous English decision, Farmer, where the claim also succeeded, because of the wider mix of assets, typical of a traditional Scottish landed estate.

What proved decisive? “The late Lord Balfour was clearly hands-on as an estate manager and had been so for many years, and Whittingehame estate like most Scottish estates, almost inherently is managed for the greater good of the larger entity rather than seeking to exploit to the maximum any particular aspect of it. That was all very helpful in showing that there was just one single business which couldn’t be artificially broken down into letting and farming”, Clark explains.

The IHT planning lesson for other estates considering the relief is to make sure the structure of the estate is set up so that the “one business” test is met. In Clark’s experience, very often there are separate farming accounts prepared to the estate accounts, “and that would be fundamental in the Revenue’s view at least. So this case illustrates how important it is to make sure you’ve got your management and ownership structure correctly put in place”.

It is necessary, he adds, to take an overview of how the different components relate to each other and how you treat the estate as a single unit for example in terms of management plans; and to identify the relative weightings given to the letting and trading activities, maybe changing the business strategy to try to strengthen the commercial inhand operations to meet the test for future IHT.

A pitfall for estates is that trading assets may already have been disposed of in the attempt to reduce IHT liability, but residential properties retained to avoid a large capital gains tax bill on disposal. Clark advises that in that situation one should consider bringing the estate back into one business, perhaps in partnership with the donee, so as to allow the possibility of relief on the let cottages. He warns that the Revenue has recently been taking a much harder line on claims for business property relief. “I was surprised just how hard the Revenue attacked this case, and I think it’s certainly a lesson for anyone advising in this area that unless your ducks are properly lined up you’re going to be fighting an uphill battle if you’re trying to claim reliefs on any sort of marginal case.”

The Revenue could still appeal the Brander decision, but would have to argue that the findings were unreasonable given the facts.

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