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Is it a business? The rules for inheritance tax relief

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Alan Boby, Partner at UK200Group member firm Ellacotts LLP, looks at what constitutes a business when it comes to obtaining inheritance tax relief.

The continued diversification of businesses in modern times has diluted the trading element of activities with other activities, such as property rentals and investment in stocks and shares.
In some cases, this can put the exemption from inheritance tax (IHT) for the owners in jeopardy and HM Revenue & Customs (HMRC) have challenged claims for business property relief (BPR) in some cases.

Firstly, a distinction must be drawn between a ‘business’ and a ‘trade’. ‘Business’ has received a wide meaning in a number of court and tax tribunal cases and it is important to review the facts.
In one case a ‘business’ was defined in terms of activities regularly carried on, involving the application of sound business principles and competition in the market. The issue of whether non-trading activities, such as the letting of property, constitutes a business qualifying for business property relief is one which regularly recurs.

Secondly, BPR can be excluded if the business consisted wholly or mainly (ie more than half) of “making or holding investments”. The official HMRC view is understood to be that the exclusion applies to lettings unless substantial additional services are provided by the landlord.

However, in the celebrated 1999 “Farmer” case the tribunal disagreed saying that the definition of ‘business’ the level of net profits was not the only test. The matter had to be regarded ‘in the round’, looking at all the aspects involved.

The Farmer case and later supported by the 2010 Lord Balfour case the following factors for each part of the business were identified as relevant:

1. The capital employed (ie asset values).
2. The time spent by the employees and the consultants.
3. The levels of turnover.
4. The levels of expenditure.
5. The profit figures.

In the Farmer case it was held that the business consisted mainly of farming and not of making or holding investments and the fact that there was a single set of accounts for the whole business and overall management was crucial in this decision.
Whilst both of the mentioned court cases related to agricultural activities, the principles of BPR apply to all types of business.

Of course, the character of a business can change over time so these matters and the overall business structure need to be kept under review. BPR availability should be reviewed for businesses that have diversified.

As with all such tax situations, advice should also be sought before proceeding. For further details call Alan Boby on 01295 250401 or email aboby@ellacotts.co.uk

Alan Boby

Ellacotts LLP

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