Tribunal Decision Gives Clearer Picture to Land Owners Over Running of Their Farming Business Model

The Tribunal held that business property relief for Inheritance tax applied to a Scottish landed estate.

 

Section 105(3) Inheritance Tax 1984 excludes from business property relief a business which consists “wholly or mainly of making or holding investments”.   Generally speaking property letting is regarded as an investment activity which does not qualify for business property relief.

 

The fourth Earl of Balfour owned the Whittinghame Estate in East Lothiam although until seven or eight months before he died in June 2003, the Earl had enjoyed a “life rent” in the estate. A life rent is in many respects equivalent to the English interest in possession under a trust.

 

The Whittinghame Estate is a small but traditional landed estate with assets including a fraction under 2,000 acres of land, five farms (two of which were let), 26 let houses and cottages (in the main let on a short hold tenancy), business premises, parkland, woodland and sporting rights.

 

The fourth Earl’s Executor applied for business property relief on the Earl’s interest in the partnership (Whittinghame Farm Co) which owned the estate and farmed the in hand land. HM Revenue & Customs rejected the application for business property relief.

 

There were three principal issues. First, whether the Earl’s interest in Whittinghame Farm Co was replacement property for BPR purposes (it was held that it was).   Secondly, whether there was one composite business of farm and estate management and thirdly, (there was indeed one composite business) whether that business of making or holding investments (in which case business property relief for Inheritance Tax would not apply).

 

The Tribunal as well as finding that the Earl’s interest in Whittinghame Farm Co was replacement property for BPR purposes, found that the Earl’s business activities which included farming and estate management formed one single composite business. The Tribunal went on to find that the single composite business was not one of making or holding investments and was conducted with a view to making a profit. Accordingly, business property relief for Inheritance Tax applied.  

 

The Balfour decision is extremely helpful to well managed landed estates run on single business model and diversified farming businesses.   The Tribunal helpfully set out five relevant pointers for use when examining whether to not a landed estate business consists of wholly or mainly making or holding investments. Langleys has produced a guide explaining these five pointers.

 

Balfour and the earlier Farmer case support the tax efficiency of planning to run farming and estate activities through one composite business and show the importance of being able to produce good quality documentary evidence of this.   Business property relief for Inheritance tax is so valuable but it should never be taken for granted.   Early, practical and structured planning can make a huge difference to the modern diversified businesses that are landed estates.

Giles Scott is a Partner in the Private Client Unit.

To speak with Giles call 01904 683232 or send him an email.