Revenue and Customs Commissioners v Andrew Michael Brander (As executor of the will of the late fourth Earl of Balfour), (2010) UKUT 300 (TCC)
Introduction
Owners of mixed landed estates will welcome a recent decision of the Upper Tier Tax Tribunal ("UTTT") in the Balfour case (often referred to as the Brander case) that inheritance tax ("IHT") business property relief ("BPR") applied to a mixed landed Scottish estate. This is the Whttingehame Estate in East Lothian owned by the fourth Earl of Balfour at his death. The case confirms the decision of the First Tier Tax Tribunal ("FTTT), which had been appealed by HMRC, as to availability of BPR in this case.
For advisers the crucial issue was whether or not BPR would be denied under section 105(3) Inheritance Tax Act 1984. This excludes from the relief a business which consists "wholly or mainly" of "making or holding investments". Letting property is generally regarded as an investment activity, not qualifying for BPR. However, although a significant part of the income of the Whittinghame Estate derived from let property, (with other income deriving from farming and related activities) BPR was nevertheless held to be applicable.
The background
The Fourth Earl of Balfour was a descendant of the First Earl of Balfour, the Scottish Conservative politician and Prime Minister. Under the Will of the First Earl (the "Will Trust"), the Fourth Earl enjoyed a liferent of the Whittingehame Estate ("the estate") in East Lothian. This was a traditional Scottish landed estate comprising of (amongst other things) approximately 1,907 acres of land, two in-hand farms, three let farms (on secure agricultural tenancies), twenty six let houses and cottages (mainly let on short assured tenancies), business premises, parks and woodlands, and sporting rights.
A Scottish liferent is akin to the concept of an "interest in possession" under a trust. As statute allowed him, in November 2002 the Fourth Earl applied successfully to the House of Lords to end his liferent in the heritable property of the Will Trust (ie the landed estate) so that, from November 2002, this property was held by the Fourth Earl outright as landowner.
Farms on the estate had been farmed in-hand by the Fourth Earl in a partnership until 1999, when the Fourth Earl's partner died. Between 1999 and November 2002 these were farmed by the Fourth Earl as a sole trade. From November 2002 they and the heritable property previously in the Will Trust were effectively transferred into a partnership (known as Whittingehame Farm Co) between the Fourth Earl and his heir, Mr Brander.
The Fourth Earl died in June 2003 and, as IHT became due, the executors (Mr Brander) applied for BPR on the Fourth Earl's interest in the partnership. HMRC rejected the application.
The points of contention
There were three main points of contention:
- In order to qualify for BPR on the value of the Fourth Earl's partnership interest, that partnership interest had to have replaced property that would have been "relevant business property" prior to November 2002, and he had to have held that replaced property and the interest in the partnership for two years or more in aggregate. Thus, as he had only held the landed estate outright as landowner and not as liferenter for only a few months prior to his death, the status of his interest before November 2002 was relevant in order to assess whether the two year ownership requirement of BPR was satisfied;
- Whether, prior to November 2002, the trustees of the Will Trust ran a business separate from the Fourth Earl's farming business or whether there was, in fact, one composite business of farming and estate management. Again, the nature of the Fourth Earl's interest in the Will Trust was relevant here, and;
- If there was one composite business of farming and estate management, whether the business was one of making or holding investments (in which case it would not be eligible for BPR).
The Upper Tier Tribunal Appeal
The UTTT's decision almost entirely supported the FTT's decision. In summary the UTTT:
- agreed that the interest of the Fourth Earl was one of a full liferenter in the assets of the Will Trust, not just in the net income of the Will Trust (as HMRC had argued). Thus at death the Fourth Earl had an interest in property (being his interest in the partnership) that had replaced an interest held prior to November 2002 that was capable of qualifying for BPR (being his interest in the assets held in the Will Trust);
- agreed that the Fourth Earl's business activities, which included (inter alia) in-hand farming and estate management, was one single composite business. There was no debate that the in-hand farming had been conducted by the Fourth Earl, but HMRC argued that he had acted in the estate management only as factor (ie agent) of the trustees of the Will Trust;
- agreed that, in the round, the single composite business was not wholly or mainly one of making or holding investments (and also agreed that the business was conducted for gain), and thus
- BPR did apply to the Fourth Earl's interest in the partnership.
Implications of the decision
The main conclusion to be drawn from the case is the UTTT''s support for the application of BPR to a mixed landed estate comprising of an element of commercially let properties, so long as those commercially let properties are but one asset component of a mixed bag of assets held in a composite business that can be said not to be wholly or mainly one of making or holding investments.
Thus it is possible to be able to ascertain with some degree of confidence whether or not a mixed landed estate will be considered to be a business wholly or (possibly more likely) mainly one of making or holding investments.
The UTTT usefully summarised the relevant case law and the relevant indiciae to be examined when undertaking this exercise. These include:
- the turnover and profitability of various activities (held by the UTTT in this case strongly to supporting the executors' contention that the management of the estate was mainly a trading activity);
- the activities of and time spent by employees and by other persons engaged in the business (held in this case by the Tribunal to point towards a predominance of trading activity);
- the acreage of the land dedicated to each activity (held by the UTTT in this case to fall approximately equally between investment and non investment);
- the capital value of that acreage (held by the UTTT in this case to be at an investment to non investment of ratio 1.88:1, ie pointing towards a predominance of investment property. However, as there was no intention to sell the estate, this was held to be of less relevance than it might otherwise have been); and
- the overall context of the business, with no one of the above factors being conclusive: they must be looked at in the round over a period of time so that, in the light of the overall picture, a view may be taken as to the relative importance to the business in question as a whole of the investment and the non-investment activities of that business (ie further support for both IRC v George and Farmer v IRC). The weight attached to any one of these factors will vary according to the facts of the particular case.
Taken in the round, the UTTT held the estate business was one mainly of trading.
A further useful point to note from the Balfour decision is the UTTT's comment that no amount of time and activity spent in managing and maintaining let properties on an estate will make them anything other than investment properties.
Conclusion
The decision should give comfort to those landed estates run on a single business model, where the estate activities, including in-hand farming, forestry/woodland, sporting activities, farm letting and residential letting are run through one composite business. Both the Farmer and now Balfour cases give support to the tax efficiency of such planning, but show the importance of being able to show (ie document) this.It is also significant that the UTTT emphasized that the different parts of the business undertaking were integrated with each other with, for example, tenants for estate cottages being sometimes selected in view of their potential contribution to the wellbeing of the estate
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