Trustees of David Zetland Settlement
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 May 2013 |
| Neutral Citation | [2013] UKFTT 284 (TC) |
| Date | 01 May 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 284 (TC)
Judge Dr K Khan, Ruth Watts Davies MHCIMA FCIPD
Hui Ling McCarthy, Counsel, appeared for the Appellant
Christiaan Zwart, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Inheritance tax - business property relief - office building and shares-whether business wholly or mainly making or holding of investments - yes - appeal dismissed
The First-tier Tribunal decided that the taxpayer trustees were not entitled to the inheritance tax ("IHT") business property relief ("BPR") under the Inheritance Tax Act 1984 ("IHTA 1984"), Inheritance Tax Act 1984 section 104s. 104 in respect of the business of a settlement of a trust. The main income of the settlement was its rental income from a real estate. The clear intention of the taxpayers in managing the business was to exploit the real estate to increase return. They hired more people, reconfigured the offices and consequently, the occupancy and rental return increased. The taxpayers pointed to an actively managed business, but the activities were predominantly investment activities or related to investment. The services which were not investment, such as the provision of various facilities to tenants, were insufficient to make the business one that was mainly non-investment. Moreover, the non-investment side seemed incidental to the core business. Thus, the settlement's business was "mainly" one of dealing in land or making or holding investments, which fell within the exclusions under IHTA 1984, Inheritance Tax Act 1984 section 105 subsec-or-para 3s. 105(3).
The taxpayer trustees appealed against HMRC's refusal of their claim for BPR. HMRC considered the taxpayers to be carrying on a business of "making or holding investments", which was excluded under IHTA 1984, Inheritance Tax Act 1984 section 105 subsec-or-para 3s. 105(3).
The ten year anniversary of the settlement of the deceased's trust was on 22 September 1987. At that time, the assets of the settlement included a leasehold interest in a property ("ZH") and ordinary shares in two companies ("AL" and "ML") which owned the freehold to ZH. It also included a property portfolio comprising 11 residential properties and a non-business asset, being a residential property occupied rent-free by a beneficiary of the trust.
The main asset of the settlement was ZH. It was a commercial building divided into units which were let to tenants for different periods of time, ranging between one and five years. Tenants received services and facilities under their lease, as well as those provided by their landlords, which they might or might not pay for. The taxpayers dealt with the general management of the property enterprises of the settlement. They were assisted by staff members performing different tasks. The tenants at ZH had the use of various facilities, including a café, gallery, meeting rooms, bicycle arch parking and Wi-Fi. The tenants paid service charges and rent to the landlords.
HMRC held that the settlement's business was not a relevant business property. Whilst the business was actively managed, the activities were predominantly investment activities or related to investment. The services that were not investment-related were insufficient to make the business one that was mainly non-investment. Even considered individually, each element to the settlement's business (ZH, property dealing and the shares in two companies) would not be relevant business property as they fell within the exclusions in IHTA 1984, Inheritance Tax Act 1984 section 105 subsec-or-para 3s. 105(3).
The taxpayers contended that they provided sufficient services to the tenants of ZH that it ought not to be classified as an investment business. They were active managers, rather than purely passive property investors. The business was therefore not one of "mainly" dealing in land or making investments.
Whether the settlement's business was "mainly" one of dealing in land or making or holding investments within IHTA 1984, Inheritance Tax Act 1984 section 105 subsec-or-para 3s. 105(3) so that the taxpayers were not entitled to BPR under Inheritance Tax Act 1984 section 104s. 104.
Held, dismissing the taxpayers' appeal:
Under IHTA 1984, Inheritance Tax Act 1984 section 105 subsec-or-para 3s. 105(3), "[a] business or interest in a business, or shares in or securities of a company, are not relevant business property if the business…consists wholly or mainly of…making or holding investments". The degree of services required to take a business out of the "mainly" holding of investments category is not stated in law. Consideration would be given to the main or preponderant activities of the business, assets and the source of income over a reasonable period. The business must be looked at as a whole and consideration given to all relevant factors to decide if mainly an investment. That would include the level of profits from the activities, turnover, employees, use of assets and time required for management. It is a question of degree and proportion.
In this case, the Tribunal found that clear intention of the taxpayers in managing the business was to exploit the real estate to increase return. They hired more people, reconfigured the offices and consequently, the occupancy and rental return increased. They had a more flexible approach to the rental of property and management.
The breakdown of the figures to 2007 showed that the rental income was the main income. The area of the building given to tenants was also substantial and was more than that allocated to other activities. The gym, café and hair salon were run by tenants and not by the settlement. While the financials or a quantitative assessment was not determinative, the analysis of the figures pointed to an investment business. Qualitatively, the taxpayers pointed to an actively managed business, but the activities were predominantly investment activities or related to investment. The services which were not investment were insufficient to make the business one that was mainly non-investment.
The provision of services and facilities to a property business would usually be ancillary to the main business. In R & C Commrs v Lockyer (personal representatives of Pawson dec'd)TAX[2013] BTC 1605, the Judge explained that where the business was one of letting a building, the provision of additional services or facilities to the occupant was unlikely to be material. They would not be enough to prevent the business remaining mainly one of holding the property as an investment. In a normal property letting business, the provision of additional services or facilities of a non-investment nature would either be incidental to the business of holding the property as an investment, or, at least, would not predominate to such an extent that the business ceased to be mainly one of holding the property as an investment. That seemed to represent the position here since the non-investment side seemed incidental to the core business.
The Tribunal also held that in respect of the share of the settlement in AL, there was nothing to indicate that the directors did anything over and above that which a normal landlord would do. They provided even fewer services than that provided to ZH. The shares could not be considered relevant business property and the ownership of the shares by the settlement would therefore constitute an investment activity. Thus, they would fall within the exclusions in IHTA 1984, Inheritance Tax Act 1984 section 105 subsec-or-para 3s. 105(3) as shares in a company where the company was wholly or mainly concerned with investments. In respect of the shares in ML, the value of the underlying asset contributed to the value of the assets held within the settlement. Thus, the holding of those shares was an investment for the settlement.
[1]The Appellants ("the Trustees") are appealing against a Notice of Determination issued by the Respondents ("HMRC") on 16 February 2010 (and a review of 28 April 2010) whereby HMRC refused IHT Business Property relief ("BPR") on the grounds that the Appellants were carrying on a business excluded under Inheritance Tax Act 1984 section 105 subsec-or-para 3section 105(3) of the Inheritance Tax Act 1984 ("IHTA") namely that of "making or holding investments".
[2]The relief was refused because immediately before the Ten Year Anniversary (22 September 2007), none of the property comprised within the David Zetland Trust ("The Settlement") were relevant business property for the purposes of Inheritance Tax Act 1984 section 104section 104 IHTA 1984.
[3]The core issue is whether the Appellants can show that its activities prevent the business from being "mainly" one of dealing in land or making or holding investments.
[4]The facts are largely agreed. The Tribunal has relied on the statement of agreed facts.
[5]The Settlement was made on 22 September 1987. The present Trustees of the Settlement ("the Trustees") are Stuart Barry Katz and his wife Jacqueline E. L. Katz.
[6]The beneficiaries of the Settlement are set out in Schedule 2 to the Settlement Deed. They are Mrs Jacqueline Katz, one of the Trustees, and Michelle, Karen and Hayley Katz, the daughters of Jacqueline E.L. and Stuart B. Katz.
[7]A 10 year anniversary tax charge fell on 22 September 2007.
[8]On 22 September 2007 a Schedule of Assets of the Settlement included:
(a) The Leasehold interest in the property known as Zetland House ("Zetland House") 5-25 Scrutton Street, London EC2, the terms of the lease being 98 years to 24 March 2089 (from 25 March 1991);
(b) Two ordinary shares in a company known as Avidpride Ltd ("Avidpride"); and (ii) one ordinary share in Mainlegion Ltd ("Mainlegion"), which owns the freehold to Zetland House.
(c) A "Property Portfolio" comprising eleven residential properties, and one non-business asset being a residential...
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