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Peter Vaines of Squire Sanders highlights some recent and apparently contradictory judgments from the Tribunals in his May Tax Update.

Good News for Capital Gains Tax Incorporation Relief and Property Businesses...

The Upper Tribunal have recently heard the appeal by Elizabeth Moyne Ramsay v HMRC [2013] UKTT 0226 in which the point at issue was whether a property, divided into 5 flats, was a business for the purposes of Capital Gains Tax - and in particular whether it fell within TCGA 1992 s 162 which deals with the transfer of a business to a company in exchange for shares.(Incorporation Relief).

Mrs Ramsay conducted various activities at the property but the First Tier Tribunal said that these activities were normal and incidental to the owning of an investment property. They arose by necessity when one owns a property which is let out as flats. Accordingly, the property was an investment, Mrs Ramsay was not carrying on a business and Incorporation Relief did not apply.

The Upper Tribunal went through all the authorities regarding the meaning of a business. They noted that there was no statutory definition of a business and that it should be construed broadly according to its unvarnished ordinary meaning.

One would have thought that a serious obstacle in this case was the facts found by the First Tier Tribunal. However, the Upper Tribunal considered that the First Tier Tribunal had made an error of law.

The relevant question was whether the activities of Mrs Ramsay constituted a business but the Tribunal had considered whether she was carrying on a trade, which is a very different matter.

Furthermore, the First Tier Tribunal did not properly assess the degree of activity undertaken by Mrs Ramsay. They had said that the activities were undertaken to maintain and enhance an existing investment property and thereby enhance the available returns by increased rents. The Upper Tribunal did not agree. They set out some general guidelines regarding what represents a business:

"It falls to be considered whether Mrs Ramsay's activities were a serious undertaking earnestly pursued or a serious occupation; or the activity was an occupation or function actively pursued with reasonable or recognisable continuity, whether the activity had a certain amount of substance in terms of turnover, whether the activity was conducted in a regular manner and on sound and recognised business principles, and whether the activities were of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them".

The Upper Tribunal decided that these tests were satisfied and that Mrs Ramsay was carrying on a business and was entitled to her relief.

This was of course a case relating to Capital Gains Tax and not Inheritance Tax. However, there have been a number of IHT cases where such activity has been considered for the purposes of Business Property Relief where the term "business" is also used and is also not defined.

...But Not for Inheritance Tax and Business Property Relief and Property Businesses

The First Tier Tribunal has also recently heard the case of the David Zetland Settlement v HMRC TC 5387. In this case the trustees of a settlement owned commercial properties which were let on a commercial basis. The issue was whether the trustees were carrying on a business for the purposes of IHT Business Property Relief because if they were not, the settled property was subject to the 10 year charge to Inheritance Tax.

The relevant test in these circumstances was found by IHTA 1984 s 105(3), which allowed Business Property Relief unless the business "consists wholly or mainly of one or more of the following, that is to say dealing in securities, stocks or shares, land or buildings or making or holding investments".

The trustees dealt with the general management of the properties owned by the settlement and were assisted by various staff members. There was an impressive list of services provided to the tenants -rather more perhaps than had been undertaken by Mrs Ramsay. There were a number of full time and part time staff including a general handyman, a property manager, an in house solicitor and 2 secretaries. There were Internet services, cleaning services and 24 hour security as well as a café, a gym and hair salon - although the latter were not operated by the trustees.

However, the Tribunal considered that these factors were insufficient "to rebut the mainly investments argument". (sic) The argument of HMRC and accepted by the Tribunal was that the trustees activities were wholly or mainly the making or holding of investments.

It is difficult to reconcile this First Tier Tribunal decision with that of the Upper Tribunal in Elizabeth Moyne Ramsay and it cannot be explained simply by the fact that one related to Capital Gains Tax and the other to Inheritance Tax. Although the legislation was different, the question was the same - was this an investment or was it a business? Both needed to consider the nature of a "business" for which there was no definition in either code.