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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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The ownership test: Changes in the nature of the business

For the purposes of the ownership test (IHTM25301) the nature of the business carried on by (or on) the business property need not be the same throughout the two year period. But there must have been a business throughout that period.

Example 1

Patrick died in January 2013. He was a working farmer who had farmed his own land for many years. Then, within two years of his death, he stopped farming part of the land and started using it for a leisure activity on a commercial basis. That part of the land cannot qualify for agricultural relief on the deceased’s death but can qualify for business relief as an asset of the deceased’s business.

The fact that the nature of the business carried on the land has changed during the two years before the death does not prevent the business as a whole, including the land, satisfying the ownership test. The land which was still farmed up to the death is reduced by agricultural relief rather than business relief.

Example 2

The basic situation is the same as in Example 1 above. The difference is that the deceased

  • carried on his combined farming and leisure activity business through an unquoted company which he controlled, but
  • retained in his own name the land on which the company operated.

As the deceased had owned the land and the control holding for the full two year period and the company had carried on a business throughout that period (though its nature had changed), the ownership test is satisfied for both

  • the shares (qualifying for 100% relief)
  • and the land (qualifying for 50% relief)

In addition the IHTA84/S112(3) user requirements are satisfied in relation to the land.

The value attributable to the rest of the land which was farmed up to the death is reduced by agricultural relief, not business relief.

Example 2 is on the basis that the new leisure activity is carried on by the existing farming company. But the deceased may have set up a new company to start and develop the leisure activity while continuing the farming business through the original company.

If the deceased acquired the shares in the new company within two years of death, they will not satisfy IHTA84/S106. However we need to consider whether they can satisfy the requirements of IHTA84/S107. So that this can be done, refer any such case via your manager to Technical.