HMRC have their eye on inheritance tax claims to business property relief and are alert to circumstances that may deny a claim by a landed estate

This brief article reviews a number of important pitfalls that lawyers should be aware of when dealing with clients’ business property relief claims for landed estates.

Land based businesses that are wholly or mainly (meaning more than 50%) trading businesses as opposed to investment business (leasing or property related income being the main examples) should qualify for 100% business property relief (BPR) after the two year ownership test is satisfied. The cases of Balfour and Farmer are the most relevant authorities.

The measures HMRC seek to apply are principally the relative percentages (i.e. trading:investment) of turnover, capital employed, profit and management time, taken against a top level “business context” test. Many estates and larger farms have a mixture of trading income (examples being in-hand farming, forestry, sporting, plus in some cases diversified activities such as green energy generation, farm shops etc), and investment income (cottage short assured tenancy rents, mast or other commercial lease rents etc). HMRC are aware that if they can swing three out of the above five tests in favour of mainly investment (over 50%), the business property relief claim will fail. One example of an activity they are targeting is furnished holiday properties and whether these have sufficient services associated with the basic letting of property to enable them to be classified as trading. Another is woodland and whether these are commercial or amenity/non-commercial. A further example could be a poorly structured contract farming agreement, where the relationship is a sham trade, i.e. rental activity dressed up as trading.

Seasonal grazing income that does not follow the detail of the guidelines set out in CLA’s definition of “profit of pasturage”, i.e. with evidence of sowing, fertiliser, fencing, repairing being undertaken by the landowner, is a further area that HMRC are reviewing. Fishings are another activity under scrutiny if services are inadequate, e.g. a ghillie, meet and greet, rod and cast preparation, tuition, accommodation etc. HMRC are seeking to argue that the activity is “the passive exploitation of land” as opposed to a genuine trading activity.

These and other examples are vulnerable areas that HMRC will review with the intention of moving three out of the five tests to the “mainly investment” side of the equation.

What are the consequences of getting it wrong? Very serious, as BPR could be denied on the whole business, not just the investment parts. More recently there has been a tendency for green energy developers to persuade landowners to sign an “option in to a lease” agreement, which simply adds to the investment activity and could have serious consequences for the BPR position of the estate as a whole. Always seek the right taxation advice to ensure proper evidence exists to achieve a successful BPR claim. HMRC are not in a compromising mood these days. 

The Author
Jamie Younger is partner with Saffery Champness, Edinburgh office. e:; t: 0131 221 2777.
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