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HMRC internal manual

Shares and Assets Valuation Manual

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IHT Business Property Relief: Meaning of investment

General

No hard and fast definition of ‘investment’ has been made by the courts.

Taxpayers may seek to infer that the wording “holding investments” connotes passive ownership and argue that extensive personal involvement by the deceased/transferor in the business cannot be classed as “holding investments”.

HMRC contested this view in the case of Moore deceased (see below) and our argument that a business of holding investments can exist whether the landlord was actively involved or essentially passive was upheld by the Special Commissioners.

The interpretation and application of s.105(3) have been tested before the Special Commissioners in the estates of Violet Moore (commercial premises) and Bertha Burkinyoung (furnished lettings) and also Weston v IRC (2000) STC 1064 and Stedman v IRC [2002] WTLR 1357 (caravan parks).

This last case was eventually decided in the Court of Appeal as IRC v George (2003) EWCA 1763 (SVM111150). More recently, the tribunals and courts have heard a number of cases involving different types of businesses which HMRC has viewed as investment businesses. These cases are considered below (serviced offices), SVM111180 (holiday lets) and SVM111180 (grazing lets).

In the George case, the Court of Appeal observed that the decision in Moore was right on its facts. It also quoted with approval the Special Commissioner’s view in the George case that there was a wide spectrum of business activity with investment activity at one end and trading activity at the other. It also agreed with the Special Commissioner’s view that previous decisions have been very much decided on their own facts.

Those cases concerned unincorporated businesses but the decisions on whether a business consisted wholly or mainly of making or holding investments are regarded as being equally applicable to the activities of companies.

These decisions of the Special are also considered to have equal application in other lettings cases.

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.

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. The activities carried out by Mr and Mrs Moore (she continued after his death) were listed as:

  • exterior repair and maintenance (including repairing walls, unblocking drains and gutters)
  • exterior decoration
  • maintenance of common areas (sweeping up litter, trimming hedges, resurfacing tarmac, maintaining toilet areas)
  • maintaining the heating system for the site
  • policing common areas (sorting out parking and rubbish problems)
  • advertising for and interviewing prospective tenants
  • negotiating renewal of leases
  • 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.

HMRC:

a. did not accept that the level of activity was sufficient to establish that there was a business for the purposes of s.105(1)(a)

and

b. argued in the alternative that, if there was a business, it consisted wholly or mainly of making or holding investments within the meaning of s.105(3).

HMRC conceded (a) before the hearing. So (b) 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
  • 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 s.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.”

Furnished lettings

Regard also needs to be had in these cases to the level of services provided by the landlord and which exceed the responsibilities as landlord.

Burkinyoung (Executor of Burkinyoung deceased) -v- CIR (1995) SC3

Mrs Burkinyoung owned a house in West London which, at her death in 1989, was split into four self-contained flats let furnished on assured shorthold tenancies. She employed managing agents who carried out the following activities:

  • organising internal and external repairs and maintaining and refurbishing the property
  • maintaining inventories of the furnishings
  • arranging the cleaning of the common areas and the maintenance of the garden
  • legal and general administration of the lettings and rent collection
  • advertising vacancies and negotiating and arranging tenancy agreements
  • responsibility for the insurance of the property, the payment of the rates and water rates and the provision of electricity to the common parts of the building, and
  • dealing with the tenants’ complaints.

HMRC conceded that Mrs Burkinyoung’s owning and letting activity consisted of a business and therefore ranked as relevant business property for the purposes of s.105(1)(a) unless excluded by the words of s.105(3). However, HMRC maintained that Mrs Burkinyoung’s business consisted wholly or mainly of “making or holding investments” and the NOD was issued on this basis. The Special Commissioners upheld the Revenue’s view, on the same reasoning as the Moore case.

Whilst both sides accepted that Mrs Burkinyoung’s owning and letting activity consisted of a business the Special Commissioner thought that it was necessary to determine what the business was. He stated:

“Both sides adopted the approach of Ralph Gibson J (as he then was) in Commissioners of Customs and Excise v Lord Fisher [1981] STC 238. That was a VAT case. The question was whether a business existed where some pheasant shooting enthusiasts had contributed to a fund to cover the cost of facilities provided for their mutual benefit and private enjoyment: in the circumstances it was held that the “syndicate” was not carrying on a business. However, Mrs Burkinyoung’s activities satisfied five tests relevant to the present question which had been identified by the judge, on page 245, in that case. Mrs Burkinyoung’s letting operations in relation to the property amounted to “a serious undertaking earnestly pursued”. They amounted to “an occupation or function pursued with reasonable or recognisable continuity”. They had a “measure of substance measured quarterly or annually”. The letting had been “conducted in a regular manner on sound and recognised business principles”. The activities were “of a kind commonly carried on by those who seek profit by them”. On that basis I think that Mrs Burkinyoung’s activities can be described as a business of owning residential property and granting furnished lets of the four flats contained in that property using the services of a managing agent”.

“In the Martin appeal (1995) SC2, another “let property” case, I based my decision on the distinction between activities of a property letting business which were carried out qua landlord of the investment property and activities that were independent of that relationship. Activities of the former class included those involved in complying with the landlord’s covenants under the lease or leases of the investment property; these included activities such as repairs and improvements which were generally designed to protect and preserve the landlord’s reversionary interest”.

“Those activities would be activities of “holding investments” in determining whether the business was one that consisted wholly or mainly of the making or holding of investments; that would be the case however onerous the landlord’s obligations might be and however much the landlord had been involved in the control or management of the property letting business.”

The Special Commissioner found that the whole gain derived by Mrs Burkinyoung came to her as rent. She provided no additional services and so earned nothing from any other sources or activities associated with the house. The appeal was dismissed.

It will be clear from both of these cases that s.105(3) can be applied without too much regard to the extent of personal involvement by the deceased/transferor. However, where services, outside those required of a landlord, are supplied they need to be taken into account when deciding whether the “mainly” qualification in s.105(3) is met. In most cases the level of services provided will not be sufficient to weigh the balance away from “investment”.

  Additional Guidance: SVM150000