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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Business relief: Investment businesses: Property consisting of a business

Firstly you should check the criteria (IHTM25152) used to establish whether the activities carried on were, in fact, a business.

Cases where property is let and involve what the courts have recognised as “income derived from the exercise of property rights” present us with particular problems. Does the exercise of those rights create a business? The answer will depend very much on the activities carried out.

Income tax treatment

There is a considerable body of tax case law on whether lettings give rise to trading for the purposes of Income Tax. However, because of the terms of the Income Tax Acts, the courts have only considered the ‘trading’ aspect and not examined whether there is a ‘business’ on a basis that could be useful for Inheritance Tax (IHT) purposes. It is important, therefore, to apply the indicators given at (IHTM25152) and the principles outlined in the Moore (IHTM25275) and Burkinyoung (IHTM25276) cases to test whether the activities carried out can rank as a business.

A similar problem arises from the treatment of income from lettings for Income Tax purposes. Income used to be assessed under the following:

Schedule A - receipt of rents only (you will see this rarely)

Schedule D, Case I - income in respect of a trade

Schedule D, Case VI - profits not assessed under any other case - i.e. not necessarily from trading.

This basis of taxation was replaced by Income Tax (Trading and Other Income) Act (ITTOIA) 2005. Trading income is now taxed under Part 2, and property income under Part 3.

Comparison between Income Tax and IHT

In Powell and another (personal representatives of Pearce deceased) -v- CIR SpC 120, the Special Commissioner decided that past income tax treatment was not relevant when considering the IHT position. At pages 7 and 8 of his decision he stated:

“I will deal first with the question of the assessments to Schedule D income tax of the income of the business carried on by Mrs Pearce. In my judgement the income tax status of the income of the business is irrelevant in the context of Inheritance Tax. The District Inspector may or may not have been correct in his assessment but his decision can have no relevance to the question which I have to decide. The availability of business property relief depends entirely on the interpretation of the provisions of the Inheritance Tax Act 1984 and I do not believe that the past income tax treatment of the income of the business necessarily throws any light on the Inheritance Tax position.”

Case handling

You should not accept that there was a business until full details of the activities are known. You will need to establish the facts in order to decide whether any business that did exist went further than just holding investments.

In most cases, however, once the activities are known it will become self evident whether or not a business exists (see the detailed reports of the Moore *and *Burkinyoung cases) and we should argue that no business existed only where this view can clearly be sustained. In practice, assuming little or no trading activity was undertaken, we may consider that if there was a business it was one of wholly or mainly holding investments and argue that business relief is not due on this basis.