Introduction

Best v. Revenue & Customs ([2014] UKFTT 77 (TC)) is a pivotal case adjudicated by the First-tier Tribunal (Tax Chamber) on January 13, 2014. The appellant, John Best, acting as the executor of the estate of Alfred William Buller, challenged HM Revenue & Customs' (HMRC) determination regarding the status of 25,000 unquoted shares in Bullick Developments (1986) Limited (the Company). The core issue was whether these shares constituted relevant business property under section 104 of the Inheritance Tax Act 1984 (IHTA 1984) or were primarily investment holdings disqualifying them from inheritance tax relief.

Summary of the Judgment

The Tribunal examined whether the Company's business predominantly involved holding investments, specifically focusing on the operation of the Valley Business Centre in Newtownabbey, County Antrim. HMRC contended that the Company's activities were mainly investment-focused, thus rendering the shares ineligible for inheritance tax relief. Conversely, the appellant argued that the provision of additional services to occupiers indicated a genuine business operation beyond mere investment holding.

After a thorough analysis of the Company's operations, income streams, and the nature of services provided, the Tribunal concluded that the Company's activities were chiefly centered on holding investments. The presence of ancillary services, such as forklift truck operations and secretarial support, did not outweigh the investment-based nature of the business. Consequently, the Tribunal dismissed the appeal, upholding HMRC's determination that the shares did not qualify as relevant business property for inheritance tax relief.

Analysis

Precedents Cited

The Tribunal relied heavily on established precedents to frame its decision:

• IRC v George (exors of Stedman decd) [2003] EWCA Civ 1763: This case provided foundational principles for distinguishing between investment and non-investment activities in property management.
• McCall (personal representatives of McClean decd) v Commissioners of HM Revenue & Customs [2009] NICA 12: Emphasized the "intelligent businessman" test to assess the predominance of investment activities.
• Commissioners of HM Revenue & Customs v Lockyer (personal representatives of Pawson decd) [2013] UKUT 50 (TCC): Reviewed and reinforced the criteria established in previous cases, focusing on the relative importance of investment versus operational activities.

These precedents underscored the necessity of evaluating the business holistically, balancing both qualitative and quantitative factors to determine the dominant nature of the activities.

Legal Reasoning

The Tribunal articulated a structured approach to determine whether a business mainly involved holding investments:

1. Allocate various business activities between investment and non-investment.
2. Assess whether the investment component is predominant.
3. Evaluate the relative importance of non-investment activities in the overall business.
4. Consider the business comprehensively, examining both income contributions and the nature of activities.

Applying this framework, the Tribunal analyzed the Company's income sources and operational activities. While the Company provided additional services, the majority of its income was derived from license fees associated with property letting, a fundamentally investment-oriented activity. Ancillary services, though present, constituted a minor segment of the business operations and revenue, insufficient to shift the predominant nature from investment holding.

Impact

This Judgment reinforces the stringent criteria for qualifying as relevant business property under IHTA 1984. It delineates the boundaries between genuine business operations and investment holdings, providing clear guidance for future cases involving property-based businesses. Tax practitioners and estate executors must meticulously assess the nature and proportion of business activities to ascertain inheritance tax implications accurately.

Complex Concepts Simplified

Inheritance Tax Act 1984 (IHTA 1984)

The Inheritance Tax Act 1984 provides the legal framework for imposing inheritance tax on estates. Key sections in this context include:

• Section 104: Defines the general relief available for relevant business property, reducing the taxable value of the estate.
• Section 105: Specifies what constitutes relevant business property, including unquoted shares in a company, subject to certain conditions.

Relevant Business Property

Relevant business property refers to assets used in a trading business, qualifying them for inheritance tax relief. However, if the business primarily involves holding investments, such as securities or real estate, these assets may not qualify, as relief is intended to support active trading enterprises rather than passive investment holdings.

Wholly or Mainly Holding Investments

This concept assesses whether the primary function of the business is to hold and manage investments rather than engage in active trading or service provision. Factors include the proportion of income derived from investment activities and the nature of business operations.

Conclusion

The Best v. Revenue & Customs [2014] UKFTT 77 (TC) judgment underscores the critical evaluation of a business's primary activities in determining eligibility for inheritance tax relief. By meticulously applying established legal principles and precedents, the Tribunal affirmed that Bullick Developments' business was predominantly investment-focused. This decision serves as a significant reference point for similar cases, emphasizing the necessity for comprehensive analysis of business operations and income sources in the context of tax relief eligibility.

For stakeholders, this judgment highlights the importance of clearly delineating business activities and ensuring that the dominant nature aligns with the criteria for relevant business property under IHTA 1984. It also provides valuable insights into how ancillary services are assessed in relation to the core investment activities, shaping future legal interpretations and tax planning strategies.