If the estate of a deceased person is valued at more than the Inheritance Tax (‘IHT’) threshold (called the Nil Rate Band or ‘NRB’), and assets are either left to a beneficiary who is not tax-exempt or those assets are not in themselves exempt, there will usually be a liability to IHT at a rate of 40% on the excess.
Exempt beneficiaries include spouses, registered civil partners and registered UK charities, and the NRB is currently £325,000, although in some circumstances the NRB may be doubled. Exempt assets include ‘relevant business property’, and the relief is called Business Property Relief (‘BPR’). The rules relating to BPR are set out in sections 103 –114 of the Inheritance Tax Act 1984.
There are several restrictions on BPR set out in the 1984 Act, including an exclusion of the relief in sub-section 105(3) for business assets being used for ‘the making or holding of investments’. There has been much case law on what constitutes ‘the making or holding of investments’, one of the most recent being the case of HMRC v Pawson. Whilst this is an English case it is likely to represent the line that HMRC will take with similar cases across the whole of the UK, including Scotland.
The Pawson family owned a holiday cottage in East Anglia, and Mrs Pawson left her 25% share under her Will to her children. Her executors claimed that the 25% was exempt from IHT due to BPR. HMRC disagreed, claiming that it was more of the nature of an investment rather than a business. The court agreed with HMRC on the basis that insufficient ‘additional services’ had been provided to the tenants to qualify for BPR.
This reasoning is in line with a series of previous cases involving owners of caravan parks, where HMRC have successfully argued that a caravan park is an investment and not a business, and therefore will not qualify for BPR. What constitutes sufficient additional services to qualify for BPR is as yet unknown, and so we can only speculate as to precisely where HMRC will draw the line between an investment and a business.
If you have any queries regarding the issues referred to in this article please contact our Private Client Department.
