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Julie Butler FCA highlights an inheritance tax case regarding business property relief and the sometimes difficult distinction between trading and investment for the purposes of business property relief.

Introduction

The case of McCall and Anor (Personal Representative of McClean Dec’d) v R & C Commissioners (2008) SpC 678 (7 April 2008) highlighted the fine division between investment and trade for inheritance tax (IHT) purposes.

Market Value of £5.8 million

The farm land owned by Mrs McClean at date of death was 33 acres and at that date was considered to have a market value of £5.8 million and an agriculture value of £165,000.  The land was zoned for development and the difference in market and agricultural value highlighted the importance of business property relief (BPR) as opposed to agricultural property relief (APR) when trying to mitigate an IHT liability on the “hope" value.

Let Land

Mrs McClean inherited the farm land from her husband on his death in 1983.  The land was not farmed by Mrs McClean but Mrs McClean let the land under conacre/agistment during the months when the grass grew and the farmer’s livestock grazed the land.  A local land agent was used to put the grazing arrangements in place.  Mrs McClean owned a house adjoining the farm land but had not lived there for the last seven years.  Mr Mitchell who was son-in-law to Mrs McClean carried out extensive work on the farm land, e.g. fencing, repairing walls, clearing rubbish and tending to drinking troughs.

“Holiday Accommodation for Cattle"

The argument presented on behalf of the Executors was that Mr Mitchell’s work was not work associated solely with the letting of land but was similar to dog boarding kennels.  In this case it was argued that the cows were being cared for by Mr Mitchell’s work, i.e. “akin to holiday accommodation for cattle". The Special Commissioners decided that the distinction was that Mrs McClean’s land was used to make a living FROM (part of) it, i.e. it was used as an investment as opposed to a business, where the land would be used to make (part of) a living ON it.

It was considered that Mrs McClean’s farm 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 Special Commissioners decided that the farm land was being used as an investment, i.e., IHTA 1984 s 105 (3) applied:

“A business…[is] not relevant business property if the business…consists wholly or mainly of…making or holding investments".

“Eatage not parcelled up and sold over the gate"

The essence of the grazing agreement in question was to allow the grazier to use the land for payment.  The Commissioners decided that the “eatage was not parcelled up and sold over the gate to the grazier". It was considered that the activities undertaken by Mr Mitchell were simply “management" activities directly related to letting the land and the whole of the income came from that land.  It should be noted that the Executors have appealed against the decision.

What action plan does this decision direct the tax planner towards?

Other Precedents

There have been a large number of cases in this area and there are a large number of precedents to compare with similar situations, e.g. IRC v George (Executors of Stedman) [2003] STC 147.  Every client situation involving letting - particularly with land values above agricultural value - does point towards a structured review for both client risk management and considered action to work towards achieving BPR.  It is understood that HMRC is planning to use this case as a direction on farm land which is farmed through grazing agreements and they will look closely to see if the activities are not a “service" but instead the “management of lettings".

Size Does Matter

The farm land in this case was zoned for development and there must have been strong indications prior to Mrs McClean’s death that BPR would be needed to support the claim for APR.  The “tax take" on a value of £5.8 million was of significance and those associated with Mrs McClean and the operations would have been aware of this - i.e., that there was considerable hope value.  The taxpayer and tax planner’s focus when considering BPR has to be on landholdings that have a high value and high potential value.  It is considered that “size does matter", i.e., the potential market value of the farm land and size of the potential “tax take" could be considered as drivers for both review and possible changes of structure and levels of activity.

The cynical reader might at this time point towards a somewhat collapsed development market with problems caused by mortgage availability and the plight of the house builder that has been the focus of much media attention. It may be that values are currently depressed but perhaps all the more reason to use the “lull" to prepare for the recovery in property prices.

The Importance of the Tax Planning Valuation

When the tax adviser is asked to review a future possible claim for BPR where there is potential “hope" or “special" value such as in this case, how key is the quality of the valuation to this work?  Clearly the ideal situation is for the valuer to provide a “red book" value i.e., a value based on the RICS code of conduct for the current position and also the time ahead as to when the claim for BPR might be made.  This obviously presents significant problems involving risk, uncertainty and cost.

Many clients might not want to pay for the cost of the valuation.  Likewise the valuer might have concerns over the uncertainty of the planning department and market predictions but would of course include this in full and clear detail in their valuation.  That then leads to the greatest uncertainty of all (on the assumption there will not be a lifetime transfer) - the date the BPR claim will refer to, (i.e. the date of death) which is very difficult to predict..

In the same way that a Farm Business Tenancy (FBT) does not achieve BPR on hope value this case brings into question the tax efficiency of grazing agreements.  Perhaps there will be a more positive move towards the robust contract farming arrangement which involves risk and far greater involvement in the farming operation.

We await the outcome of the appeal with interest.