£1.6m IHT tax dispute highlights complexities of reliefs for farm businesses

It can be dangerous to assume that all the assets owned by a farming family will be exempt from Inheritance Tax (IHT).

When a business is receiving income from a range of non-farming activities, Agricultural Property Relief (APR) will not be available on the full value of the farm but if it can be shown that the business is predominantly a trading business then the whole property can instead qualify for Business Property Relief (BPR).

This has been the subject of several tax tribunals and court cases and involves analysing a number of different factors including turnover, profit, asset value and management time. It was illustrated by a recent tax tribunal concerning converted farm buildings in Hampshire. It has been reported that £1.6 million of IHT was at stake, and unfortunately for the family concerned, HMRC was successful in denying a claim for BPR.

In this particular case, until 2004, the partnership was a typical arable farming business, but between 2005 and 2008 farm buildings were converted into a wedding venue and the arable farming activities dwindled.

In order to qualify for BPR there must be an active trading business. If HMRC can show that a business is one of wholly or mainly holding investments, then no relief is due. In many cases, a wedding venue will be a trading business rather than an investment business, but it all depends on the facts of the case which were as follows:

• The business employed a sales team whose job it was to attract couples to book the venue.
• The business also provided cleaning and maintenance services between events.
• The venue did not employ their own caterers or bar staff, but instead provided a list of approved suppliers, and the wedding couple had to engage separately with them.
• In 2008 the business employed an events team who were on-site during weddings to deal with any issues as they arose. However, due to ill-health of the active partner, in the two years leading up to her death, these duties were taken over by the catering company.

In previous decisions regarding BPR, the courts have stated that there is a broad spectrum of activities relating to the exploitation of land. At one end is the simple renting out of a property (no BPR), and at the other end is the provision of a hotel room which is a trading business (qualifies for BPR). Unfortunately, in this case, employing a sales team to attract customers, and employing cleaning and maintenance staff were not sufficient to move the business far enough along the spectrum so that it qualified for BPR.

The outcome here may have been different had the venue engaged the caterer, bar staff, florist, etc and included these services in the price charged to the wedding couple.

This serves as an example of how crucial it is that the position is kept under constant review to ensure that any changes in the way a business is operated, such as those caused by illness or old age, do not result in an IHT liability.