Business Property Relief – Zetland Trust Denied BPR
Background – what is BPR?
Business Property Relief (BPR) is a valuable tax relief which can reduce the taxable value of business assets for inheritance tax purposes, potentially to nil.
BPR is available in respect of transfers on death/in lifetime as well as inheritance tax charges during the lifetime of a trust (such as the 10 year charge or exit charge for trusts within the relevant property trust regime such as discretionary trusts).
However, BPR is not available in respect of business assets where 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”
In practice this means that there is often uncertainty as to whether BPR is available in respect of property businesses.
The Case – The Trustees of David Zetland Settlement TC 02690
The case of The Trustees of David Zetland Settlement concerned the availability of business property relief on the occasion of the trust’s 10 year charge.
The trust held a mixture of assets, however the major points of the case centred around the leasehold interest in Zetland House.
Zetland House is a commercial property divided into a number of smaller units let on a short-term basis to businesses- typically for a period of between 1 and 5 years. The strategy of the business was therefore broadly akin to a serviced office.
Additional services were made available to tenants including; conference rooms, a mail room, reception and porter staff, cafe, communal events such as summer barbeques, christmas parties, wi-fi, bicycle stands, cleaning, 24 hour security as well as a gym & hair salon.
The tribunal found that whilst additional services were provided, those services were incidental to the core business of letting property. Therefore business property relief was not available.
The following useful points arose:
- It is the nature of the activities and not the degree/level of activities that should be looked at (HMRC v Pawson UTT 050)
- The tribunal must look at the business in the round, with no one factor being determinative (CIR v George & Loochin (Stedman’s Executors) STC147)
- It was appropriate to look back over 5 years to get a flavour of the nature of the business (Martin v IRC STC5)
- HMRC sought to argue that the starting point was that a property business will not qualify for BPR and the taxpayer must rebut that presumption. However the tribunal felt that they should have an open mind and not pre-judge the issue at the outset
The tribunal did note that there is no general rule that businesses involving office space can never qualify for BPR.
Therefore, property letting businesses should take tax advice rather than assume that BPR will be available – recent case law suggests that the bar is typically quite high.