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HMRC internal manual

Shares and Assets Valuation Manual

HM Revenue & Customs
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IHT Business Property Relief: Wholly or mainly

Wholly or mainly test

The “wholly or mainly” test is not an easy test to apply. In deciding whether a business falls within s.105 (3), regard will be had to its preponderant activities, assets and sources of income or gains at the time of the transfer and over a reasonable period leading up to it.

S.105(3) does not refer to the income, or the capital or the activities of the business. All aspects of the business must be considered.

It is not possible to lay down any precise ground rules. Each company has to be looked at in the round. It may however be readily accepted that, where the majority of both the tangible asset value and profit of the company is attributable to trading activities, relief is available.

Useful guidance on the interpretation of S. 105(3) was provided by the Special Commissioner in the case of Farmer v IRC (1999) SpC 216. That case involved a landed estate on which a business was run which had both farming and letting elements. In reaching her decision, the Special Commissioner took into account the following factors:

  • the overall context of the business
  • the capital employed - that means the value of the assets employed in the trading and investment sides of the business
  • the time spent by the directors and employees
  • how turnover is split between trading and investment elements
  • the amount of profit derived from the investment and non-investment sides of the business.

Having examined these factors, the Special Commissioner said it was “…necessary to stand back and consider in the round whether the business consisted mainly of making or holding investments.” [In CIR v George & Loochin (Stedman’s Executors) [2004] STC147, Carnwath LJ also emphasized the importance of looking at the business “in the round”.] On the facts of the Farmer case, the Special Commissioner concluded that the business did not consist mainly of making or holding investments - and thus that Business Relief was available in full. In any case where there are both investment and non-investment elements to a business, you should use the Farmer tests so far as possible. but because these can call for difficult judgements, you should consult the Appeals Team at an early stage if the decision looks other than very straightforward.

The ‘Farmer’ tests were applied in the later case of Clark and Another v HMRC [2005]STC(SCD)823 - in which it was decided that the investment side of the business predominated, so that relief was precluded by s.105(3).

Hybrid businesses were also considered in the case of Commissioners for HMRC v A.M. Brander (as executor of the Will of the late 4thEarl of Balfour) [2010] UKUT 300 (TCC). The Tribunal applied the same principles as in Farmer in a situation where the activities may also have constituted more than one business.

Asset value and income mainly attributable to investment but large trading turnover

Particular difficulties may arise where, although the majority of asset value and income is attributable to investment, there is a large trading turnover. In such cases all the relevant information must be assessed, including:

  • the ratios of asset value and profit attributable to trading and investment respectively;
  • the ratio of turnover to investment income;
  • the degree of activity involved on the trading as opposed to the investment side measured for example by the size of the labour force (sub-contracting work will count for less), directors’ time, and so on.
  • any particular reasons for low trading profits, for example, the fact that the company was engaged in a low profit-making sector or was subject to heavy competition;
  • whether the investments or their income were being used to subsidise trading losses, especially to carry it through a short term difficulty;
  • how the company was described in the Directors’ Report to the annual accounts.

It is emphasised that the above factors are intended to be neither exhaustive nor conclusive. They are examples of the considerations to be taken into account.

Looking at a reasonable period

In applying the “wholly or mainly” test the position should normally be looked at over a reasonable period prior to the transfer, to allow for temporary fluctuations in activity and performance. See FPH Finance Trust Ltd v IRC House of Lords [1944] 1 All ER 653. The following comments by their noble lords in that case are relevant.

“I cannot think that the definition is framed so that a company may be an ‘investment company’ say in January, when its trading business is going badly, but is not an investment, say, in March, when its trading business has recovered…”. “The alternative and I venture to think more reasonable view is that the words indicate companies of a particular type or character, judged no doubt by the kind of income which they have normally received. If the investment income B has constituted a major part of the total incoming flow during a period sufficient to enable a fair judgement to be formed as to the character of the company then the company is stamped an ‘investment company’” - Viscount Maugham read by Lord Macmillan

“The opposite view that a company, while still continuing its ordinary trading, may be an investment company one year and a non-investment company the next, popping in and out of the Inland Revenue pigeon-holes as trade was bad or good, seems to me inconsistent with the language used and from a business point of view to be deprecated.” - Lord Atkin read by Lord Porter

”…some period of time must be taken into consideration, and I can see no reason for confining the enquiry to the company’s income during the previous year or 15 months.” - Lord Porter

It is possible that the essential nature of a business may change in the period leading up to the transfer. Whether any change is sufficient to bring a business within s.105(3) must be determined after careful consideration of all facts relating to the business in the period leading up to the transfer, with a view to establishing the essential nature of the business at the valuation date. The length of the period to be reviewed will depend upon the facts of a particular case.

Where there has been a clear and definite change in direction, only the position after that change should be taken into account.

Where the ‘wholly or mainly’ test is a problem, refer the matter to the Appeals Team, via your Team Leader.

  Additional Guidance: SVM150000