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Matthew Hutton MA, CTA (fellow), AIIT, TEP, presenter of Monthly Tax Review, reports a recent decision of the Special Commissioner in respect of a claim for business property relief for inheritance tax purposes.

Matthew Hutton

Context: the issue

It is well known that under IHTA 1984, s 105(3) a business which consists wholly or mainly of making or holding investments does not attract BPR.  The issues in this case were:

• whether the letting arrangements did constitute a business;
• whether it belonged to the landowner (in that the work was carried out by her son-in-law when her mental capacity failed); and
• whether s105(3) applied to exclude relief.

McCall and Keenan (as PR’s of Eileen McCLean deceased) v HMRC: the facts

Until her death in January 1999 Mrs McClean owned about 33 acres of farmland at Ballyclare in County Antrim.  She had a house adjoining the land, and one of her two daughters, Mrs Mitchell, lived with her husband, Mr Mitchell, next door. Mrs McClean’s other daughter lived in County Tipperary.  Unfortunately the relationship between Mrs McClean’s two daughters was somewhat strained.

Mrs McClean inherited the land from her husband on his death in 1983.  She did not farm the land herself, but it was let under conacre (or, more technically, agistment) agreements to local farmers, and those farmers’ beasts grazed the land during the months when the grass grew. Throughout this period Mr Mitchell tended the land.

As Mrs McClean grew older her memory and mental capacity diminished.  Prior to her husband’s death she had been an active decisive woman, but thereafter there was a rapid decline.  In 1986 or 1987 she started living with Mr and Mrs Mitchell for most of each day, returning to her own house only for a couple of hours.

After her husband’s death Mrs McClean used the services of local land agents to let the fields. As Mrs McClean’s mind failed Mr Mitchell became more involved with the arrangements.

In 1992 Mrs McClean went to visit her daughter in Tipperary.  She was taken there by neighbours in their car.  Mr and Mrs Mitchell expected it to be a short visit, but Mrs McClean remained in Tipperary until her death some 7 years later.  Her mind continued to deteriorate during that time.

While Mrs McClean was away Mr Mitchell continued to tend the fields and also organised their letting, usually through a land agent.  The rents were paid into Mr and Mrs Mitchell’s bank account and were not paid out to Mrs McClean.  Mr and Mrs Mitchell continued to look after Mrs McClean’s house.

The local council zoned land which included Mrs McClean’s fields for development use.  As a result at the time of her death the market value of the land was £5,800,000 whereas its agricultural value was only £165,000.

In this appeal Mrs McClean’s personal representatives claimed that the land is ‘relevant business property’ within IHTA 1984 s105.  If it was then the whole of the value of the land would fall out of charge to IHT at her death; if it is not, then only the agricultural value would fall out of charge.

The decision: Spc (Charles Hellier)

While Mrs McClean did own a business at the date of her death whose assets did include the fields, the business was one which consisted wholly or mainly of the holding of investments.

Rationale

Was the activity a business?

It was common ground that the approach outlined by Gibson J in Commissioners of Customs and Excise v Lord Fisher [1981] STC 238 and followed by the Special Commissioner in Burkinyoung (Executor of the Burkinyoung (deceased) v IRC [1995] STC (SCD) 29 was appropriate when determining whether an activity is a business.  In Lord Fisher, Gibson J accepted that six indicia formulated by counsel for the Crown and derived from previous cases plainly described the main attributes of any activity which would be regarded as falling within the concept of ‘business’ and ‘trade, profession or vocation’, and accepted that those indicia were useful tools for the analysis and comparison of an activity; but he noted that the indicia did not substitute any test or phrase different from that in the statute.

The six indicia were these:

(a) whether the activity is a serious undertaking earnestly pursued, or a serious occupation, not necessarily confined to commercial or profit making undertakings;

(b) whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity;

(c) whether the activity has a measure of substance as measured by the quarterly or annual value of its outputs (the original words are ‘taxable supplies’ but they derived from a VAT case);

(d) whether the activity is conducted in a regular manner and on sound and recognised business principles;

(e) whether the activity is predominantly concerned with making supplies (again, the original words were ‘taxable supplies’ but that was in a VAT context) to consumers for consideration; and

(f) whether the supplies are of a kind commonly made by those who seek to profit from them.

Of these, (b) to (f) derive from the judgments of the Court of Session in Morrison’s Academy Boarding Houses Association [1978] STC 1, and Mr Hellier noted that the reasoning of their Lordships in that case derives indicia (b), (c) (e) and (f) specifically from a consideration of the VAT legislation.  Nevertheless they seemed to him to be helpful criteria in the context of IHTA 1984 against which to examine an activity even if they are not conclusive.

The activity of tending the land undertaken by Mr Mitchell coupled with the annual letting of the land was, just, enough to constitute a business.  On its own the mere letting of the land under agistment arrangements for each season would be no more of a business than depositing money with a bank and awaiting the interest (see Jowett v O’Neill and Brennan Construction 1998 STC 482 at 489d per Park J); it might have been a business if there were very many pieces of land to be let and many deals to be struck, but those were not the facts in this case.   What just tipped the scales in this appeal was the extra work done tending the land.  Mr Mitchell did that work. Some of that work may have been motivated by duty or enjoyment but nevertheless it was done. Some of the work (like fencing repairs) would have been necessary under the terms of the letting contract, and some may have been needed or would be helpful to ensure future lettings.  There was some activity and the work was something which ‘required attention’.

The letting of the land was earnestly pursued, the work tending the land was modest but serious, the letting and the tending were pursued with some continuity, the income was not insubstantial, the letting was conducted in a regular manner, although the unpaid use of Mr Mitchell’s time was something which is not a feature of an ordinary business, and the letting of land for profit is a common business.  The Lord Fisher indicia pointed towards a business.

Whose business?

HMRC contended that if any business activity involving the use of the land occurred between the beginning of 1993 and Mr McClean’s death in January 1999, it was carried on, not by Mrs McClean, but by her son-in-law Mr Mitchell.  They said that he had been responsible for the making of the arrangements with the agents for the lettings and it was on his instruction that the rents were paid into his joint bank account with his wife. It was he who did the work on the land. They noted that prior to Mrs McClean’s death, Mr and Mrs Mitchell neither paid nor accounted to Mrs McClean for those monies and that from 1993 Mrs McClean appeared to have taken no part in any activity involving the use of the land.  They said that any business was conducted and owned by Mr Mitchell only, and that Mrs McClean simply owned the land.

However, it was clear that, whether or not Mr Mitchell was Mrs McClean’s agent in the two years before her death, he was a fiduciary for her in relation to her property at Ballyclare. Mr Mitchell’s dealings with Mr McClelland before 1992 were held out as being on behalf of Mrs McClean.

As a result it seemed that the income from the fields belonged to Mrs McClean as it arose, and that it was not income arising from her relationship with Mr Mitchell, but income from her land.

But the question was not merely whether the income from the land arose to Mrs McClean, but whether the business belonged to her; and the business was more than the ownership of the land and the receipt of income therefrom.

It seemed that if the labour – the activities which transformed mere profitable ownership into a business – had been carried on by an employee paid by a fiduciary it would be natural to say that the activities were to be treated as those of the beneficiary. If Mr Hellier was right in finding that Mr Mitchell was a constructive trustee rather than simply required to account for his profit, the consequence was that his activities in making that profit were properly to be treated as those of Mrs Mitchell, and the business was to be treated as belonging to Mrs McClean.  Therefore Mrs McClean owned the business constituted by the activities of Mr Mitchell and the letting of the land throughout the two years prior to her death.

Was the business wholly or mainly one of holding investments?

In the evidence the letting of fields to graziers was described as having been made in ‘conacre’, but there is a technical distinction between conacre and agistment, and under that technical nomenclature the arrangements in relation to the fields would have been agistment rather than conacre.

Conacre letting is a system of agricultural land tenure which is peculiar to Ireland.  In its original form the landowner would designate to each conacre tenant a strip of land to which the tenant was given access to plant and cultivate a crop, but the tenant did not own the crop until he had paid for it in money, labour or by a share of the crop.

A letting in conacre is not a demise of land but in the nature of the sale of a profit to be derived from the land, or a temporary easement creating a licence to use land. But since the arrangement is created by contract, the nature of the incidents will depend upon the contract; in Maurice E Taylor the Court of Appeal recognised that the features of conacre letting have changed with the passage of time and depend upon the contract.

Agistment by contrast is the letting of land for grazing. 

What then were the features of the grazing agreements entered into for the fields?  Following Mr McClelland’s evidence of the terms which would generally be understood to be applicable, those terms would by custom or necessary implication be included in the contract with the grazier.  It seemed that those terms and the guidance from the cases above permit the following conclusions:-

(i) the making of the ‘conacre’ lettings did not deprive Mrs McClean of possession of the fields, or of her right to occupy the fields save to the extent that any element of that occupation would interfere with the grazier’s right to graze his cattle or sheep;

(ii) the grazier obtained a right as against Mrs McClean to accommodate his animals on the fields for them to graze the fields and to be the only person whose animals were to be grazed on the fields.  These rights gave a measure of exclusive enjoyment to the grazier.  That was not exclusive occupation as it was in Maurice E Taylor, for in that case the conacre tenant could exclude all others from the land, whereas in the case of the graziers their rights to exclude others related only to others with competing or interfering purposes; and

(iii) it seemed that the grazier would not be in paramount occupation (since an agistment holder is entitled to grazing of the land only, and possession remains with the landowner, it is the latter who will usually be in rateable occupation).

Having reviewed a number of earlier cases, Mr Helier took as of relevance to the investment question six aspects of Carnwath LJ’s judgement in IRC v George and another (executors of Stedman, dec’d) [2004] STC 147, as follows:

(i) the exploitation of a proprietary interest in land for profit is capable of being an investment activity so that the land is an investment and part of the business is holding it, but there is a wide spectrum, at one end of which is the exploitation of land by the granting of a tenancy and at the other end of which is the exploitation of shop premises by a shop keeper.  The land subject to the tenancy would generally be an investment and the business therefore include holding investments, but the shop would not be an investment (or the business not one wholly or mainly of holding investments);

(ii) the holding of property for letting is generally the holding of it for investment;

(iii) the formulation adopted in Weston at paragraph 15 that ‘land is generally held as an investment where gain is derived from payment to the owner for the use of the property’ can be a helpful indication of when land may be an investment;

(iv) property management is part of the  business of holding property as an investment. To this extent investment business activity is not limited to purely passive business. ‘Management’ for these purposes includes the activity of finding tenants and maintaining the property as an investment but does not extend to providing additional facilities whereby the landlord may earn additional fees (eg for cleaning and heating) whether or not included in the lease or covered by the rent;

(v) where there is a composite business it is necessary to look at it in the round; and

(vi) where there is a composite business the statutory words must be applied as a whole to all the activities: one is not required to open an investment bag into which all activities linked to an investment are placed (because they are ancillary to the investment) and weigh that against the remainder; instead one must look at the business as a whole.
 
Mr Hellier also noted that in George, the letting of fields on grazing licences to a farmer was treated by the Special Commissioner as being an investment activity and that no adverse comment was made in the Court of Appeal on that treatment.  But Mr Hellier accepted that that was a minor point of the taxpayer’s activities in that case and would not have received detailed consideration, and that the facts may have been very different (the detailed terms of the lettings are not recorded).

Conclusions

The business was one which consisted wholly or mainly of the making of investments.

First, because the activities of the business consisted of the making available of its major asset to other persons for payment without the separate provision of any substantial other goods or services.  Such a business was clearly one which satisfied the composite phrase a ‘business which consists of the holding of investments’ without the need further to dissect that phrase.  Mr Massey’s submission that what is sold was the grass rather than exclusive possession did not deter Mr Hellier from this conclusion: the activities of the business did not involve the cutting of the grass and the feeding of it to the cattle, but simply making the asset available so that the cattle might live and eat there: the income arose substantially from the making available of the asset not from other activity associated with it or from selling separately the fruits of the asset: that was the business of holding an investment, and it was the main activity of this business.

Second, if Mr Hellier were not permitted this broad approach to the legislation and was required to dissect it and to determine whether the land was an investment and if so whether holding it was the main part of the business, he would come to the same conclusion.

The land was used not to make (part of) a living on it, but to make (part of) a living from it: it was used as an investment.  The land was not used to create a product or to provide any service distinct from the use of the land (other than the provision of the water).  The essence of the grazing agreement was to allow the grazier to use the land for payment; the grazier’s use encompassed the taking of the eatage – if the grazier chose to put animals on the land and if they chose to eat it - but the eatage was not parcelled up and sold over the gate to the grazier; instead the grazier was given the right to use the land in a particular way for payment.  That use may not have been exclusive, but it seemed sufficiently exclusive to be clear that the land was being used as an investment.

The whole or almost the whole of the business consisted in the activities of the making available of the land: the inspection and repairs to fencing, the attention to the drains, the weed control and the finding of the grazier were all ‘management’ activities directly related to letting the land, being either necessary under its terms or desirable for further lettings, and the whole of the income came from the letting.  Looked at in the round there was little else than the business of holding an investment.

The activities surrounding the letting (except perhaps the provision of water) were not so substantial as to constitute themselves a part of the business distinct from holding the land: this was not like a car hire business where income derives from the letting of a car but where the cleaning, servicing, insuring and dealing in the cars may be such a large part of what is done to say that it is not just a business of holding cars; instead the major part of what was done was letting the land and the other activities a necessary part of that or small in comparison.

(McCall & Keenan as Personal Representatives of Eileen McClean v HMRC SpC 678)

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