To have and to hold (as an investment) – Inheritance tax relief for wedding venues and property businesses
Business property relief (BPR) reduces the taxable value of business assets for UK inheritance tax purposes by either 100% or 50% and is therefore a valuable relief. It can apply to businesses run by sole traders, partnerships or companies or even to assets that are simply used by a business, even if not owned by them. The key is that there must be a business.
However, a business is not eligible for BPR if it consists wholly or mainly of making or holding investments. Where a business involves exploiting real estate, HMRC has frequently argued that the business is of holding investments and so BPR is not available. This has resulted in a string of cases, the latest of which (Butler v HMRC TC 8949) denied relief for a wedding venue business.
That case involved a mixed business. Mrs Butler, who died in 2015, was a partner in a limited liability partnership (the other partner being her late husband’s Will Trustees), which operated a farming, commercial letting and a wedding venue business, using an historic barn on the farm. In determining whether a business is wholly or mainly holding investments, the business needs to be looked at as a whole. So, although the farming element of the business was not an investment activity, the value of the LLP interest attributable to the farming business would only be eligible for BPR if the business of the LLP as a whole was considered not to be an investment. The commercial lettings business was agreed to be an investment activity. The case therefore rested on whether the wedding venue business was or was not an investment.
The wedding venue business began in 2004. An empty barn was converted and, over a period to 2012, landscaping works were undertaken and Mrs Butler’s expertise of wedding planning grew. While customers had to book their own suppliers, Mrs Butler would advise couples on their wedding day, providing information on local suppliers, transport and the best locations for photographs. She would ensure the wedding and alcohol licence requirements were met. The LLP hired two employees who would assist Mrs Butler in setting up and cleaning up after a wedding day. The number of weddings in 2004 was just 3, but rose to 56 in 2012 and 95 in 2015 when Mrs Butler died, at which pointed turnover amounted to over £350k. Marketing for the LLP was provided by a third party and a third party provided the catering. In 2013, the third party caterer was replaced following complaints. The new caterer also took over many of the other functions provided by the LLP and took a lease of the kitchen. At around the same time, Mrs Butler was diagnosed with terminal brain cancer.
The First Tier Tribunal (FTT) confirmed that there is a two stage process in determining whether a business is wholly or mainly an investment. First, one must look at the individual components of the business and categorise them as an investment activity or a non-investment. Second, one must step back and look at the whole picture of the business.
In doing this, the FTT had to decide an appropriate period over which to judge the business and relevant components. It decided that the appropriate instance in this case was the two years since the new caterer took over many of the LLP functions and the date of Mrs Butler’s death as that point represented a fundamental change in the business of the LLP. However, there is no fixed period given in the legislation or the case law over which one must view the business; in this case it was two years, but it has been five years in another cases.
In reviewing the individual components of the business over this two year period, the FTT concluded that many of the services had been taken over by the third party provider since 2013. Of those services that remained, the venue hire was characterised as a business of holding the barn as an investment, given Court of Appeal and Upper Tribunal cases, which highlight that owning and holding land for profit is generally an investment activity. This is so even if it requires some active management in maintenance to the land and ensuring regulatory compliance, so those components of the business were also characterised as being part of an investment business. Even the advice provided by the LLP was considered to be ancillary to acquiring new customers for the venue hire and so would be an investment activity. The FTT agreed that some services were not investments, e.g. cleaning and the provision of a dance floor.
Taking a step back to review the business as a whole the FTT found that the business was ineligible for BPR. The LLP did not provide any services that went significantly beyond amenities that are provided in a property held predominantly for investment services. Interestingly, it said that this was the case even before 2013 when the LLP played a more active role in the other services provided. On balance, hiring the barn was more like hiring a community hall than a fully serviced wedding venue, which would be more likely to be eligible for relief.
The FTT noted that there was no bright line test as to whether a business is trading or holding investments where the business includes exploiting land for profit. Nevertheless, Butler v HMRC TC 8949 adds to a long line of case law that indicates BPR may be an uphill struggle where a business seeks to hire out land or buildings for profit. A much wider range of services must be provided with a property rental business in order to attract BPR.