BPR and APR update

Emma Chamberlain OBE

Pump Court Tax Chambers

16 Bedford Row London WC1R 4EF

echamberlain@pumptax.com

Tel 0207 414 8080

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Structure

• Overview

• Some traps and planning points

• Structuring a group tax effectively – the “mainly” test

• Meaning of making or holding investments

• Borderline cases - recent case law

• Excepted assets

• Investment businesses

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Overview of BPR and APR

• 100% exemption from IHT in most cases (up from 50% in

1992) 50% for assets held outside the business

• Difficult relief, has to apply to different types of businesses –

sole trader, partnership, listed and unlisted companies,

trusts, land and buildings held outside the business

• Generous but potentially arbitrary in effect with complex

requirements

• Increasingly expensive reliefs – costing about £1 bn a year

• HMRC had an informal consultation on the reliefs in 2016/17

but did nothing; OTS now looking at inheritance tax more

generally

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Overview of BPR

1. Why special reliefs for business and farms? Death an

arbitrary event so exemption needs to be generous to avoid

forced sales – paying IHT even over ten years in interest

free instalments can be a burden as it is generally funded

out of taxed income of the business

2. Policy objective may have changed – originally to ensure

continuity in the family business but now to encourage

investment into AIM and smaller companies

3. Disapproval shown by Resolution Foundation to BPR and

APR suggesting reliefs should be limited to active owner

run businesses

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Overview of BPR and APR

1. Minimum period of ownership before qualifying for BPR or

APR on agricultural land farmed inhand is only two years

and no clawback if sale of business or farm occurs after

death.

2. 7 years ownership required for APR on tenanted land and

no BPR

3. CGT uplift on death

4. Other countries e.g. Ireland have a clawback after death if

sold; Canada has a rollover of the CGT. Germany has a

longer minimum holding period geared at family run

companies

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Relationship between APR and BPR

• Both concerned with businesses where there is an intention

to make a profit

• APR given in priority to BPR

• Differences in treatment of farmhouses

• APR only applies to agricultural value, not hope value:

hence BPR is important for farmers if their land has hope

value

• APR can be obtained on let properties (if ownership for

seven years rather than two and at 100% if post-1995) –

does not need to be part of a trading business: relief limited

to agricultural value

• Differences re companies – a company owning agricultural

land must be controlled by the transferor for APR to be

available

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Clearance procedure – lifetime gifts

• Clearance procedure now available if gift of agricultural or

business property could involve immediate inheritance tax,

i.e. there is a proposed gift into trust which is an immediately

chargeable transfer

• Clearance valid for six months

• Provides certainty in estate planning

• Unusual to have a clearance procedure of this sort in UK tax

system

• Keep trying!

• DOTAS - transfers are generally not disclosable but some

caveats e.g. if you transfer BPR into a trust subject to say an

option to buy back so the trust ends up with cash

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What must be transferred?

• Until Nelson Dance in 2008, it was thought that BPR was

only available on a transfer of the business or part of the

business. So if land owned by a business was settled on to

discretionary trusts, the land was not itself an interest in the

business and was therefore denied relief

• Nelson Dance confirmed that as long as the value

transferred is attributable to the value of relevant business

property, BPR is available

• So, for example, a business that is predominantly one of

housebuilding but has acquired a number of tenanted

properties can be changed to remove the tenanted

properties so that it is mainly trading again. Can assist on

cash gifted out of companies e.g. Brexit donations?

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Trusts and BPR

• What if a trust holding business or agricultural property sells and

holds cash?

• Remember that if the trust owns property qualifying for relief at

the ten year anniversary there is no exit charge for the next 9.9

years even if property sold and cash is distributed– don’t sell just

before a ten year anniversary. Remember the rate is based on

the rate at the ten year anniversary which was 0%

• Different in the first ten years when the rate on exit is based on

the value when first settled plus any additions. Just because

there was no tax payable on settlement of (say) the farm into

trust does not mean that you can distribute without an exit

charge if the farm is sold and cash paid out in the first ten years

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Claw back of reliefs

• No clawback on death (and CGT uplift)

• If the donee gives or sells the business property and the

donor dies within seven years of the lifetime gift, there could

be a clawback of relief but here there are also anomalies

Example

Roger gives some unquoted shares to his daughter, dying

within seven years. The company is no longer trading at the

date of his death, having sold the trading business and

started renting out properties. There is no clawback of relief.

If, however, daughter had sold or given the company shares

to her husband then there is a clawback of relief

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Claw back of reliefs

• The clawback rules do not work the same between PETs

and chargeable transfers.

• If the lifetime gift was a failed PET then the PET is fully

chargeable but if the lifetime gift is immediately chargeable

although there can be a clawback there is no alteration in

the cumulative total of the transferor.

• Assume a gift of a farm into a trust worth £325K attracts

100% relief. If donor dies within 7 years although relief is

clawed back and the chargeable transfer is treated as being

£325K, if this falls within the donor’s available nil rate band

no charge arises. No adjustment in his cumulative total and

so his NRB is not used up against the gift. The clawback

has no effect on the tax position.

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Two year rule – change in nature of business

• Two year rule – s106 Two year ownership of company but

not necessarily as a trading entity

• Example – Freddie owns X Ltd for many years renting out

properties. X Ltd sells up a year before death and starts

trading

• Does Freddie get relief?

• No requirement in s106 for the business to be trading i.e.

relevant business property for two years only for the shares

to be owned

• HMRC appear to accept this provided company is not

dormant

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Two year rule

• Original IHTM25303 HMRC noted in relation to section 106:

“Business property is not relevant business property unless it was owned

by the transferor throughout the 2 years immediately preceding the

transfer. The nature of the business carried on need not be the same

throughout the 2 year period but there must have been a business

throughout that period. E.g. if the company carried on an investment

business until one year before a transfer and then changed to a trading

activity, its shares would be relevant business property if the transferor

had owned them for 2 years before the transfer.”

• IHTM25303 has been amended and now reads as follows:

“For the purposes of the ownership test, the nature of the business carried

on by or on the business property need not be the same throughout the 2

year period but there must have been a business throughout that period.”

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Switch debt to equity –death bed planning

• Vinton v Fladgate Fielder [2010] EWHC 904 Ch

• Shares acquired via a rights issue are treated as having

been acquired at the time of the original holding (so the

normal two year ownership does not need to be met).

• A business need for the money raised by the company

should be shown

• A subscription for further shares does not avoid the two year

rule

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Restrictions on BPR – the mainly test

• The business must not be “mainly” making or holding

investments: s105(3). Note it is not a requirement as such

to trade

• Mainly = more than 50%

• If a sole trader or partnership has 51% trading activities and

49% investment (eg let properties) 100% relief is obtained.

• If a company has 51% trading and 49% let properties the

same is true although if the let properties are put into a

separate subsidiary then no relief is available- see s111.

• Holding company activities permitted if mainly the holding

company of a trading group

• Spread investment properties throughout the group

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Holding companies – structuring a group

• Holding companies can trade/hold investment property but

should be mainly holding companies of a trading group.

• In practice HMRC seem to look at the group as a whole

even if holding company is mainly trading and only minimum

activity as a holding company. Watch the position if mainly

investment

• Intermediate holding companies permitted

• Loans up and down within the group are permitted if

reasonable even if interest free

• Avoid singleton investment property companies unless

properties used in trade – mix up the properties in the

trading and holdco

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Structuring a group effectively

Holding company structure (1)

Holding

company

Trading

subsidiary say

60% of total

value – relief

Investment

subsidiary

of let

properties

say 40% of

value- no

relief

What if the investment subsidiary

borrows and the borrowing is used

for the trading part?

What if the holding company lends

to the investment subsidiary?

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Structuring the group effectively

Holding company structure (2) Full relief

Holdco

relief

Subsidiary

mainly

trading

Investments

Investments Trading

100

%

51%

49%

49%

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The mainly test

• Easy to see that letting out cottages is an investment activity

but when run as part of a larger business such lettings can

still qualify under the umbrella of the trade if overall it is

mainly not investment

• Farmer test approved by the Court of Appeal in Stedman

requires one to look at matters “in the round”. Looking first

at:

• Overall context of business; capital employed

• Time spent; turnover; profit

• Employees

• Findings of fact become very important.

• Do not produce separate accounts or VAT returns. Run the

business as one

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When is a business “mainly” investment or “mainly” trading? Brander - [2010] UKUT 300 (TCC)

• The Scottish estate had 26 let properties with high capital

value; two farms in hand; sporting rights and woodland; two

sets of business premises. Capital value of let properties

much higher

• Nevertheless it was held that it was mainly a trading rather

than an investment business and was a single business

rather than two businesses, even though it had separate

accounts and VAT registration for the inhand farming

activities. Employee time higher; turnover and net profit

more on the farming side; overall context was not that of an

investment business

• However, let property in its own right can never qualify

whatever the service content – it can only qualify as part of a

larger business that is mainly not investment

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What is an investment? Borderline businesses

“Is the holding of assets to provide a profitable return merely

incidental to the carrying on of some other business or is it

the very business carried on by the taxpayer” Cook v Medway

Housing [1997] STC 90

• Look at the past history and future plans and look at the

quality, purpose and nature of the company and its activities

including the full circumstances in which the relevant assets

are acquired and retained and the objects clause in the

memorandum

• A question of fact to be determined by the Tribunal

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What is making or holding an investment? Borderline businesses

• String of cases on let property: Martin and Burkinyoung

[1995] Active involvement of the landlord makes no

difference: it is the character of the activity not the level of

activity that matters.

• Caravan parks Hall [1997] and Powell [1997]: main source of

income was rent or pitch fees. No relief

• Cf Furness v IRC [1999] where greater net profit from sales.

Relief

• Weston [2000] – no relief.

• George/Stedman decision [2004]: comprised site fees, sale of

caravans; selling gas, electricity water at a profit, storage,

club, grazing agreement.

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Borderline businesses – caravan parks

• The Court of Appeal noted:

The section does not require the opening of an investment bag

into which are placed all the activities linked to the caravan

park, including even the supply of water, electricity and gas

simply on the basis that they are ancillary to that investment

business. Nor is it necessary to determine whether or not

investment is the very business of the company. The statutory

language does not require such a definitive categorisation. ..it

gives insufficient weight to the hybrid nature of a caravan site..

…the holding of property as investment was only one

component of the business..

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Pawson [2013] UKUT 050 and holiday lets

First Tier Tribunal allowed appeal – too active an operation to be

regarded as letting

But overturned by Upper Tier Tribunal:

FTT had misdirected itself – presumption of investment

Starting point is that holding real-estate in order to generate an income from it is nearly always an investment- no distinction between active and passive property investment businesses. Finding tenants, grant of leases, management of property all are necessary parts of a business of holding investments. Other services are unlikely to be material

Other types of property lets also affected - see Zetland [2013] and Best

[2014]

See Green [2015] and Ross [2017] – both holiday lets which failed to qualify for relief

What about hotels and car parks? See IHTM 25280

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Borderline cases – livery: Vigne [2017] UK FTT 632 (TC)

• Livery – worming, providing hay feed, removing horse manure from fields; undertaking daily checks on health of horses; 20 hours work a week by yard managers; turnover £20K and profit £63

• Held not to be just a mere right to occupy a particular piece of land Business being run from land and providing services to people keeping horses there. Judge suggested looking at subjective intention of the landowner, whether land is being held as a long term or short term investment and “a fine dividing line”

• Services cannot be compartmentalised as mending fences may assist on maintenance of the land but also keeps horses safe

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Borderline Businesses

• Money lending: lending money at interest is normally an

investment. See BIM 62201

• However consider degree of organisation, loan book, length and

number of loans, credit licences, documentation, accounts, renewal

of same loans, profits, security, activity

• Phillips not a good decision – connected loans to be avoided.

• Charge interest.

• Large number of small loans

• Arrangement fees; do not allow loans to remain outstanding

• Loan book actively managed

• Do not roll up interest

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Excepted assets

• Cash – not used in the business and not required for future

use

• HMRC say it is an excepted asset if use cannot be

demonstrated

• Barclays Bank v IRC [1998] cf Browns Executors v IRC

[1996]

• If on current account – excepted unless needed in the

business

• What about if on money market? An investment asset but not

excepted – still used in the business

• Avoid interest free loans to directors or to companies outside

the group

• Avoid redundant farm buildings standing empty and not in use

for agricultural purposes. Consider a commercial letting.

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Dealing with investment businesses

• No BPR for pure investment; APR on tenanted land

• Freezer scheme

• Deferred share scheme

• Sale for IOU scheme

• Change the nature of the business so mainly trading

• Transfer shares to an EBT?

• Leave to spouse either outright or on interest in possession

trust and get CGT death uplift. S/he can then make lifetime

gifts

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Conclusions

To tax and to please, no more than to love and be wise, is not

given to men [or women]

• Is all this current complexity good value for money?

• Is the distinction between making and holding investments

the same as trading and investment activity?

• Could the government get more revenue, more easily by

having one tax that really works (CGT) consistently rather

than several that don’t and can be avoided?

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The ideas contained in these slides should not be relied on by any person in any particular case without taking further specific advice.

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