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HMRC internal manual

Inheritance Tax Manual

Business relief: Investment businesses: Lettings of commercial premises

These may tend to be the most clear cut type of ‘investment’ cases as written tenancy agreements - detailing both the landlord’s and the tenant’s obligations - may exist and there may be little other activity on the part of the landlord.

In the 1990s, and again more recently, HMRC contested the following cases involving commercial premises at the Special Commissioners (SC) and First Tier Tribunal (FTT) whose decisions here (and in the *Burkinyoung *(IHTM25276) case) have equal application in other lettings cases.

It is worth noting that although SC and FTT cases have no formal precedent value, they may be persuasive in relation to later litigation on similar facts.

Martin & Horsfall (Executors of Violet Moore deceased)-v- CIR (1995) SC2

At her death in 1991, Mrs Moore owned a site on which several industrial units were erected. Since the 1960s she and her husband (who died in 1989) had let the units on three year leases to various businesses.  Mr and Mrs Moore carried out various activities:

  • exterior repair and maintenance, exterior decoration, maintenance of common areas, maintaining the site heating system, policing common areas, advertising for and interviewing prospective tenants, negotiating renewal of leases and dealing with tenants’ complaints.

Mr and Mrs Moore were extensively and personally involved in these activities often undertaking painting, removing rubbish and maintaining the heating themselves and frequently visiting the site.

We did not accept that the level of activity was sufficient to establish that there was a business for the purposes of IHTA84/S105(1)(a), and argued in the alternative that, if there was a business, it consisted wholly or mainly of making or holding investments within the meaning of IHTA84/S105(3).

We conceded the first point before the hearing, so S105(3) was the sole issue for the Special Commissioners.

The Special Commissioner held that the operations carried on by Mrs Moore were the owning of freehold premises; those operations were conducted by:

  • seeking and choosing tenants, granting and renewing leases, complying with the specific landlord’s covenants and managing the premises.

The gain obtained was the “net rents and nothing else”.

The Special Commissioner decided that a business in fact existed; he said Mrs Moore

“… conducted a continuing activity on what seems to have been sound business principles and in a manner characteristic of commercial landlords of like properties.  Those features, I think, elevate her activities from mere ownership or mere investment into a business …”

However, he did not accept the executors’ argument that the extensive personal active involvement by Mrs Moore made the business more than just holding investments:

“There is no necessary implication in the words of section 105(3) that the expression ‘business of holding investments’ is to be confined to the passive investment of property such as long leases managed by managing agents. To imply that is to narrow the scope of the words of exclusion to a point that is not in line with their ordinary meaning. It leads to the result that activities which could reasonably be described as incidents of investment holding, such as the active, efficient and energetic management of the reversion, have to be left out of the investment holding side of the equation in determining whether the business can properly be described as wholly or mainly of making or holding investments.  In line with the principle that the words of a relieving provision should not be given a generous construction, it follows that words of exclusion found, as here, in the relieving provision should not be given an unnaturally restricted meaning.”

In applying the principle in Fry -v- Salisbury House Estate Ltd 15 TC 266, that a distinction can be drawn between the activities of a landlord which he assumed under the lease and those which are separate from the land­-owning part of the business, he stated:

“The activities which a landlord carries out because he is obliged to under the lease are incidents of the tenancy and so fall on the ‘holding investments’ side of the equation. The business activities, if any, carried out by the landlord for gain and which are not required by the lease fall on the other side of the equation. The activities carried on by the landlord which are not required under the lease and for which he receives no separate consideration will fall on the ‘holding investments’ side of the equation if they are connected with and incidental to the holding of the property as an investment.”

In applying this to Mrs Moore’s business he found that:

“…active though [her] business was, none of the activities…..were concerned with anything other than the making or holding of investments…..they were all part and parcel of the business of making or holding investments.”

and dismissed the executors’ appeal accordingly.

It can be successfully argued therefore that many of the activities carried out purporting to be services are no more than the normal obligations of a landlord, particularly if the activities are prescribed obligations under a tenancy agreement.

The more recent First Tier Tribunal cases are:

Trustees of David Zetland Settlement v Commissioners for HMRC [2013] UKFTT284 (TC)

This case concerned a commercial building in London, Zetland House, which was divided into units let to tenants for different periods of time ranging between 1 and 5 years. Under the terms of their leases, tenants were required to pay service charges and rent.  The rental part constituted around 75-80% of the total income. The appellants maintained that the tenants received services under the lease as well as those provided and charged for separately. The tribunal noted the wide spectrum of cases involving land exploitation and the importance of the specific facts in determining the outcome in a particular case.

The tribunal considered the wide range of services and facilities provided at Zetland House. It noted that this business was an actively managed business, but one whose activities were predominantly investment activities or related to investment.

The tribunal judge found that the purpose of these active management activities was largely to improve the building and its fabric and to keep the tenants there and to keep the occupancy rates high. Income from such facilities as a cycle rack, gallery, coffee shop, hairdressing salon and gym was all rental income. What services that were provided, such as post sorting and delivery, reception and provision of free food and drink at social functions, did not tip the balance in favour of non-investment.

John Best (Executor of the estate of Alfred William Buller deceased) v Commissioners for HMRC [2014] UKFTT 077 (TC)

This case concerned shares in a company owning and managing the Valley Business Centre in County Antrim. The business centre provided office, industrial and warehouse space for small to medium sized businesses. Businesses occupying units paid monthly licence fees on a weekly basis under a standard licence agreement. A monthly service charge was also payable for such services as grass cutting, pest control, site security, buildings insurance, site maintenance and a receptionist service. A second schedule provided for further services available at an additional charge, for example, provision of a forklift truck and driver, secretarial and photocopying services and boardroom hire.

The company derived approximately 70-75% of its income from the licence fees and employed 3 full time and 2 part time employees, and 3 security guards.

The tribunal considered the nature and extent of the services provided, with their analysis involving both qualitative and quantitative assessments, and concluded that the additional services did not predominate: “the real nature of the business remains an investment business  exploiting the land by granting tenancies and licences.” This meant that it “puts the Business Centre well towards the investment end of the spectrum.”