BPR on commercial property

Posted by on Jun 10, 2013 in Tax | 0 comments

The Trustees of David Zetland Settlement v HMRC (2013)

In a First Tier Tribunal case reported on the 1st May 2013 the question of when a business consists of ‘wholly or mainly making or holding investments’ (IHTA 1984 s105(3)) was considered.

A business that falls into this category will not be ‘relevant business property’ eligible for Business Property Relief (BPR) from Inheritance Tax.

The David Zetland Settlement owned, amongst other things, the head lease of a 140,000 sqft commercial building in Scrutton Street, EC2. The building was divided into 53 separate units. These were let as serviced accommodation on short term leases generating an annual income of close to £2.4m.

On the face of it this looks like an investment business but the appellant sought to argue that this was not the case due to the additional services provided.

The Settlement, or its management company, employed several people who worked on the building including porters, cleaners, a solicitor, manager and secretaries. Additional services provided in the building included a reception area, post room, conference room, café, gym, hair salon, internet services, bicycle stands, project management, cleaning and security. These items were either charged by use or through the service charge. Some of these services were run by the tenants.

The judge considered that the non-investment activities would need to constitute more than 50% of the business to satisfy the ‘mainly’ test. This was considered in terms of income generated – a test that few lettings businesses are likely to be able to satisfy.

The judge commented ‘The appellants point to an actively managed business but the activities are predominantly investment activities or related to investment. The services which are not investment are insufficient to make the business one that is mainly non-investment’. He considered that the non-investment side was incidental to the core business, in line with the findings of Pawson v HMRC [2012]. He added that ‘the non-investment activities are primarily concerned with increasing the return from the building’.

BPR was denied by the judge.

It is clear from this case that to avoid being wholly or mainly investment any trading activity in relation to a lettings business is going to have to be very significant, ideally more than 50% of total income. Providing a handful of additional services to attract and hold tenants will just be considered the prudent actions of a successful landlord.