The Upper Tier Tribunal has made an important decision in relation to the traditional Scottish landed estate of the Earl of Balfour, rejecting HMRC’s contention that investments held as part of a business should not qualify for inheritance tax business property relief (BPR). This means that assets which together form part of a single business should qualify for BPR, even though if looked at individually they would not qualify for BPR.

The decision has a number of 'pluses' and 'minuses'.

On the plus side:

• the decision makes clear that activities which, if they stood alone would be regarded as holding of investments, can form part of a larger business which itself may qualify for BPR;
• it recognises management flexibility within the business as a whole. In the Balfour case the use of the assets had varied from time to time over their life. Provided the business was mainly a non-investment business in the relevant period (i.e. the two years before death) the assets could qualify for BPR;
• a liferent (in England & Wales a life interest) in trust property could amount to a business in itself where the nature of the interest was such as to give the liferenter/life tenant effectively all of the rights of proprietorship over the business, even though the liferenter was entitled to income only and capital remained the property of the trustees;
• assets which would themselves be treated as non-business in nature are not excluded from relief where they form part of the business as a whole;
• separate accounting for 'divisional' profits and the division of income between trading and non-trading as prudent business practice do not mean that there are separate businesses.

Qualifications:

• the court paid close attention to the original intention to maintain the estate as a single entity. That made it easier for the court to find that there was a single business. It might be more difficult to establish such unity in a business that had developed gradually, especially one where diversification had been funded by additional investment or even borrowing. Great care is needed to show that all growth was organic and arose as a development from the original root;
• that was the Upper Tier Tribunal: it’s a long way to the Supreme Court;
• each case depends on its facts. HMRC will no doubt try to draw distinctions in situations other than landed estates.