IHT ruling spells relief for landowners

Traditional estate landowners were given good news last week after a tax tribunal in Scotland rejected an appeal from HM Revenue & Customs (HMRC) that could have landed many rural estates with huge inheritance tax (IHT) bills.

Property agents say the decision removes a great deal of uncertainty for owners of traditional landed estates that conduct a mixture of trading and investment activities. It is also a reprieve for investors seeking IHT relief through funds that invest in UK farmland.

Farmland qualifies for agricultural business property relief (BPR), which means that all the land as well as a portion of the farmhouse is exempt from IHT after two years – provided that the owner actively farms the land or has a farming contract in place based on shared profit. Investment activities, including the letting of property, do not qualify
for BPR.

The case revolved around HMRC’s decision in 2008 to deny 100 per cent BPR on the Whittingehame estate of the late Lord Balfour.

The HMRC claimed that the Balfour estate should not be eligible for BPR because the letting income derived from land and
properties on the estate meant its business consisted “wholly or mainly of the holding or making of investments”.

The Whittingehame Estate extended to just over 1,900 acres and included a farmhouse, two in-hand farms totalling 665 acres, three let farms totalling 917 acres, policy parks and woodlands of 308 acres. It also consisted of 26 let houses and cottages, and two business premises.

HMRC’s original decision was overturned by a First Tier Tax tribunal last May that said the lettings activity on the estate was ancillary to the main business of the estate, which was farming. Last week, HMRC’s appeal to the 2009 ruling was rejected by Scotland’s Upper Tax Tribunal.

“The decision of the First Tier Tribunal in 2009 was welcomed but was short on detail about the judge’s reasoning,” said Simon Dixon-Smith of Savills.

“This judgment adds clarification, which will enable estate owners to be more informed in terms of whether their own property assets are likely to benefit from this valuable relief.”

The judge determined from previous case law – the 1999 case known as Farmer – that the business should be looked at “in the round” to form a view on the relative importance of both investment and non-investment activities to the overall business.

The tests set out in Farmer included analysing the overall context of the landed estate, its turnover and profit, the time spent on its various activities and the capital value of the activities.

While 65 per cent of the capital value of the Whittingehame Estate was attributed to investment activity, the judge gave this factor a low weighting as the intention was to pass on the estate to family rather than sell it. It was also found that around 80 per cent of time was spent on trading activities rather than the investment side of the business.

“If the HMRC had been successful, it could have landed many traditional rural estates with huge inheritance tax bills on the death of the owner,” said Tom Barrow of Knight Frank. Such estates often combine farming and letting activities, which, until Balfour, had generally been viewed in the round by
the HMRC.

Property agents say landowners should make sure the status of their property as a whole is kept under regular review to maximise the chances of BPR being granted on death.