Williams and Another (Executors of the Estate of Campbell Deceased)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 March 2018 |
| Neutral Citation | [2018] UKFTT 136 (TC) |
| Date | 13 March 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0136 (TC)
Judge Rachel Short, Mr William Haarer (Member)
Mr George Rowell of St John's Chambers, Bristol appeared for the appellant
Mr John Brinsmead-Stockham, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Inheritance tax – Whether rental payments under a ten-year lease should be a deduction against business property under IHTA 1984, s. 110(b).
The First-tier Tribunal (FTT) held, dismissing the taxpayers' appeal, that future rental payments were deductible from the value of business property for inheritance tax.
The main question in this appeal was whether liabilities under a Lease where Mr Campbell undertook his sole trade, “Duncan Campbell Fine Art”, should be included as a deduction in determining business property for inheritance tax.
Mr Campbell occupied 15 Thackeray Street under a lease which was granted for a ten-year term starting on 25 December 2005. Under the terms of the lease, rent was payable quarterly in advance and was so paid from his business bank account. The rent was an expense within his accounts.
Mr Campbell died in February 2011. Following his death, the remaining lease interest was surrendered, and a negotiated payment made to the landlord of £34,998.57.
A corrected account for Inheritance Tax (“IHT”) was submitted on 5 December 2011 including a claim for business property relief of £171,790. The claim included stock in trade but excluded the liabilities under the Lease. A claim for future lease rental payments, up to expiry of the lease in 2015, and other small amounts of unpaid rent (totalling £116,572) was included as a deduction against the general estate.
The appeal by the Appellants was against a Notice of Determination issued by HMRC on 5 October 2015 under s. 221 of the IHTA 1984. The result of that notice was increased inheritance tax due on the estate by £45,500 – the part of Mr Campbell's estate which qualified for business property relief was reduced by a sum of £113,750, being the future rental on the remaining term of the lease of Mr Campbell's business premises (“the Rental Payment”). It was stated that the Liability falls to be taken account of in valuing the Deceased's Business having regard to IHTA 1984, s. 110(b).
The Appellants' arguments were that:
- the Rental Payment was not a business liability which should be taken account of as part of the value eligible for business property relief under IHTA 1984, s. 105 and instead should be a deduction from the general estate only; and
- the Rental Payment did not fall within the IHTA 1984, s. 105 definition of business property.
The Appellants placed reliance on the decision of Hardcastle v IR Commrs (2000) Sp C 259. The Hardcastle decision rejected a “balance sheet” approach to defining assets and liabilities for inheritance tax purposes.
Further arguments were put forward as to the value of the lease given HMRC suggested they would accept that the value of the Lease under IHTA 1984, s. 5(3) should be a negative £34,998.57 (the sum paid to surrender). It was contested that the value of the lease was a new argument and not part of the Notice which was the subject of the appeal and if considered by the Tribunal, the value of the Lease needed to be considered at the time immediately before death.
HMRC's position was that the Lease was clearly a business asset because it was vital for the business, paid though the business bank account and included as an expense in the accounts (including the surrender payment).
HMRC did not consider that the Hardcastle case was a binding authority and was wrongly decided, because:
- It concerned distinguishing between income and capital losses which is not in the IHT legislation;
- It assumes that trading losses and liabilities should be brought into account on death for IHT purposes and failed to appreciate the distinction between the two made in the Reed (HMIT) v Young [1986] BTC 242 decision;
- If there is a capital/revenue distinction to be made, it does not follow that there is a similar distinction between losses and liabilities; and
- If applying Hardcastle in the circumstances, the paintings that were trading stock and accepted as relating to business property assets, should also be excluded.
The FTT considered that the Appellants' interpretation of s. 110(b) attempted to separate the components of a business regarding some of them as not to be treated as assets or liabilities and instead excluding them. The premise was not contained in the legislation and was only partially supported by the Hardcastle decision.
It was concluded that the general intention of the business property relief provisions of the IHTA 1984 is to ensure that all assets of a business should be free of inheritance tax in order to preserve the viability of the business. Given the lease was vital for the business it should not be excluded from the relief.
The Appellants' appeal therefore fell to be dismissed. With regard to the value of the lease, the FTT concluded that the Notice should be varied to refer to an amount equal to the market value immediately before death.
The decision of the FTT appears more logical than that proposed by the Appellants. Whilst there was merit finding an argument that would have reduced the IHT liabilities, in this instance it was based on a case that did not sit well with the particular circumstances being considered.
[1] This is an appeal by the Appellants (acting through Mr Timothy Mark Williams) against a Notice of Determination (the “Notice”) issued by HMRC on 9 October 2015 under s 221 of the Inheritance Tax Act 1984 (“IHTA 1984”).
[2] By that Notice HMRC increased the inheritance tax due on the estate of Mr Campbell by £45,500 by reason of deducting from the part of Mr Campbell's estate which qualified for business property relief a sum of £113,750 being the rental outstanding on the lease of Mr Campbell's business premises (“the Rental Payment”), stating that “the Liability falls to be taken account of in valuing the Deceased's Business having regard to section 110(b) Inheritance Tax Act 1984” (“IHTA 1984”).
[3] The Appellants appealed against the Notice to HMRC on 9 November 2015 and to this Tribunal by a notice of appeal dated 4 August 2016.
[4] Mr Campbell died on 14 February 2011. The Appellants were appointed as his executors.
[5] Prior to his death Mr Campbell had carried on business as a proprietor of a fine art business in London “Duncan Campbell Fine Art” from premises at 15 Thackeray Street, Kensington, London.
[6] Mr Campbell occupied 15 Thackeray Street under a lease (the “Lease”) dated 4 May 2007 which was granted for a ten year term starting on 25 December 2005. The annual rental was £22,750, payable quarterly in advance.
[7] Mr Campbell paid the rent on the Lease from his business bank account and recorded it as a business expense in his accounts.
[8] After his death the remaining leasehold interest in 15 Thackeray Street was surrendered for a negotiated sum of £34,998.57 to the landlord.
[9] The Appellants returned an IHT 400 for Mr Campbell's estate on 26 July 2011 and a corrected account on 5 December 2011. The corrected IHT account included a claim for business property relief of £171,790, relating to Mr Campbell's stock in trade, but excluding Mr Campbell's liabilities under the Lease and a claim for £116,572 as a deduction against Mr Campbell's general estate, (being the Rental Payment under the remaining term of the Lease of £113,750 and other amounts of rent outstanding at his death).
- £171,790 of business assets (the paintings held in Mr Campbell's business on his death) were properly treated as part of his estate subject to business property relief.
- The £113,750 Rental Payment on the Lease of Mr Campbell's business premises was deductible from Mr Campbell's general estate for IHT purposes.
- The £113,750 Rental Payment was properly characterised for tax purposes as a revenue item.
- Any question of the valuation of the Lease as at the date of Mr Campbell's death is outside the remit of this Tribunal.
[10] The main question in dispute between the parties is whether the £113,750 Rental Payment should also be deducted from the part of Mr Campbell's estate which qualifies for business property relief.
[11] Sections 4 and 5 of the IHTA 1984 set out the general charge on a person's estate on death:
IHTA s 4 Transfers on death
(1) On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death
IHTA s 5 Meaning of estate
(1) For the purposes of this Act a person's estate is the aggregate of all the property to which he is beneficially entitled, …
(3) In determining the value of a person's estate at any time his liabilities at that time shall be taken into account, except as otherwise provided by this Act
Sections 104 and 105 IHTA 1984 set out the relief from inheritance tax for any part of the deceased's estate which is attributable to “relevant business property”
IHTA s 104 The relief
(1) “Where the whole or part of the value transferred by a transfer of value is attributable to the value of any relevant business property, the whole or part of the...
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