Brander (Earl of Balfour) v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 16 August 2010 |
| Neutral Citation | [2010] UKUT 300 (TCC) |
| Date | 16 August 2010 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2010] UKUT 300 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Lord Hodge, Sir Stephen Oliver QC.
Roderick N Thomson QC (instructed by the Solicitor to HM Revenue and Customs) for the appellants.
Julian Ghosh QC and Elizabeth Wilson (instructed by Turcan Connell) for the executor.
The following cases were referred to in the judgment:
Bayne's Trustees v BayneSC (1894) 22 R 26
Burkinyoung's Executor v IR CommrsSCD (1995) Sp C 3
Cathcart's Trustees v AllardiceSC (1899) 2 F 26
Clark, ReUNK (1871) 9 M 435
E v Secretary of State for the Home DepartmentELR [2004] QB 1044
Edwards v BairstowELRTAX [1956] AC 14; (1955) 36 TC 207
Farmer's Executors v IR CommrsSCD (1999) Sp C 216
Fetherstonhaugh v IR CommrsTAX [1984] BTC 8,046
IR Commrs v GeorgeTAX [2003] BTC 8,037
Johnston v JohnstonSC (1904) 6 F 665
Johnstone v Mackenzie's Trustees 1912 SC (HL) 106
Lady Miller v IR CommrsELRTAX [1930] AC 222; 15 TC 25
Lloyds TSB Bank plc v HaywardUNK [2002] EWCA Civ 1813
McCall v R & C CommrsTAX [2009] BTC 8,059
Moore's Executors v IR CommrsSCD (1995) Sp C 2
Scales v George Thompson & Co LtdTAX (1927) 13 TC 83
Smart's Trustee v Smart's TrusteesENR 1912 SC 87
Inheritance tax - Exempt transfers and relief - Business property relief - Replacement property - Deceased having liferent interest in family estate - Deceased declared to be fee simple proprietor of estate - Deceased entering into partnership with intended successor - Whether deceased's interest in partnership, which subsisted immediately before his death, replaced previous business carried on by deceased - Whether business excluded from business property relief as consisting mainly of making or holding investments - Inheritance Tax 1984, Inheritance Tax Act 1984 section 105 subsec-or-para 3 section 106 section 107ss. 105(3), 106, 107.
This was an appeal by the Revenue and Customs Commissioners (HMRC) from a decision of the First-tier Tribunal ([2009] UKFTT 101 (TC); [2009] TC 00069) allowing the appeal by Mr Brander as Lord Balfour's executor against a notice of determination denying inheritance tax business property relief (BPR) in respect of the late Lord Balfour's interest in the Whittingehame Farming Company (WFC) in relation to assets of the Whittingehame Estate, namely land, houses and cottages, which were let to third parties.
Lord Balfour held his interest in Whittingehame Estate as a liferenter under the will of the first Earl of Balfour. The will, executed in 1923, was an unusual and complex document. In it the first Earl sought to preserve intact through successive generations the family estate of Whittingehame, East Lothian, which then comprised, among other things, Whittingehame House, agricultural and forestry land, amounting to approximately 10,000 acres, and ancillary houses and cottages. Since the first Earl's death in 1930, his trustees had sold off substantial parts of the estate, including Whittingehame House, principally to meet death duties. As a result, when Lord Balfour died in June 2003, the estate was an agricultural estate of contiguous units located immediately to the south east of Traprain Law, amounting to 771.85 hectares (1,907.25 acres). It comprised (a) Whittingehame Tower Farmhouse, (b) Whittingehame Mains Farm and Eastfield Farm, which were operated in hand, (c) Luggate, Papple and Overfield Farms, which had been the subject of separate agricultural lets since the 1950s, (d) policy parks, woodlands and sporting rights, (e) 26 let houses and cottages and (f) two sets of business premises. In November 2002 the House of Lords, on an application by Lord Balfour under section 47 of the Entail Amendment (Scotland) Act 1848, ended his liferent by holding that he was entitled to a declaration that he was the fee simple proprietor of the heritable estate. In January 2003 an extract decree of the court declaring Lord Balfour's fee simple proprietorship was recorded in the Register of Sasines. From then until his death Lord Balfour owned Whittingehame Estate. With effect from 10 November 2002 Lord Balfour entered into partnership, called the Whittingehame Farming Company (WFC), with his nephew and heir, Mr Michael Brander, who later became his executor. The estate's heritable properties were included in the capital of that partnership. The partnership business was estate management and farming. The executor's contention was that it continued the previous business which Lord Balfour had carried on.
The First-tier Tribunal ([2009] UKFTT 101 (TC); [2009] TC 00069) concluded that, on the evidence, it was plain that Lord Balfour had used the trust assets as part of the overall business enterprise carried on by him for gain at the estate so that IHTA 1984, s. 49 and 110 were applicable, as was the reasoning in Fetherstonhaugh (Finch) v IR Commrs [1984] BTC 8,046. In his capacity as liferenter (until November 2002) Lord Balfour had to be treated as beneficially entitled to the property in which the liferent interest then subsisted, essentially the whole estate. The fact that the trust was a separate entity did not mean that there had to be two separate businesses. HMRC appealed to the Upper Tribunal contending that the First-tier Tribunal had erred in law in its analysis of Lord Balfour's interest in the heritable properties in the trust estate while a liferenter and that the Upper Tribunal should make further findings of fact. HMRC's submission was that Lord Balfour operated a separate business of in-hand farming through WFC, whether as a partner or a sole proprietor, and in relation to the rest of the estate management he acted as agent or factor of the trustees. On the evidence, the tribunal should have concluded that Lord Balfour's interest in the partnership immediately before his death was not relevant business property for the purposes of IHTA 1984, s. 104, having regard to the provisions of s. 107. Further, the relevant business was excluded from business property relief as consisting mainly of making or holding investments within s. 105(3).
The following issues therefore arose on the appeal: first, the status of his interest before November 2002; secondly, whether, before the liferent was replaced by fee simple proprietorship, the trustees ran a business separate from Lord Balfour's farming business; thirdly, if Lord Balfour carried on a composite business of estate management and farming on the estate, there was an issue whether on a proper analysis the business was to be characterised as one mainly of holding investments: s. 105(3). There was also an issue whether the First-tier Tribunal erred in failing to make certain findings of fact. HMRC accepted that, if Lord Balfour carried on a single composite business of estate management and farming activities, his business was carried on for gain under s. 103(3).
Held, dismissing HMRC's appeal:
1. HMRC's contention that on a correct construction of the will Lord Balfour's interest was not equivalent to a proper liferent of the estate was rejected. The words which the first Earl of Balfour used were perfectly apt to set up a liferent and there was no reason why the words should not be given their natural meaning. The will was an attempt by the first Earl of Balfour to preserve his estates, and in particular Whittingehame Estate, and to give his heirs as wide powers to enjoy the estates as were consistent with their preservation. There was no inconsistency between the wish to preserve Whittingehame Estate and the grant of a full liferent interest to his successive heirs. The tribunal construed the provisions of the will as directing the trustees to grant to Lord Balfour the powers equivalent to those of a proper liferenter. There was no error of law in that construction.
2. The tribunal did not err in law in concluding that Lord Balfour used the trust assets as part of the overall business enterprise which he carried on for gain. He was a liferenter of the whole estate. Lord Balfour carried out the management of the estate both on a day-to-day basis and in terms of strategic decision-making, including in relation to capital disposals. He gave instructions to the solicitors acting for the trustees and they carried out his instructions. The trustees played a passive administrative role, leaving the management to Lord Balfour and the solicitors. The existence of separate trust accounts and accounts for WFC was consistent with the terms of the will which envisaged separate accounting for the in-hand farming business. It did not compel the conclusion that there were two separate businesses. Nor did the tribunal err in law in the application of Fetherstonhaugh. The fact that the trust was a separate entity from Lord Balfour did not mean that there had to be two separate businesses. (Scales v George Thompson & Co Ltd (1927) 13 TC 83 considered.)
3. HMRC had not made out a case for the Upper Tribunal to make further findings of fact. The First-tier Tribunal was entitled to conclude that Lord Balfour operated the estate as one business before November 2002.
4. The tribunal was entitled to conclude that s. 105(3) did not apply because Lord Balfour's business at Whittingehame Estate did not consist mainly of holding investments. The letting side of the business was ancillary to the farming, forestry, woodland and sporting activities of the business. The tribunal had erred in treating the let farms as part of the farming (i.e. non-investment) side of the business but that error was not material as properly stated the farmed acreage and the let acreage were about the same. Lord Balfour's management and planning activities in relation to the let residential units did not prevent that aspect of the estate business from being the holding of investments. The in-hand farms and woodlands fell to be treated as non-investment activity throughout. HMRC's contention that the woodlands were to be treated otherwise because Lord Balfour as...
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