England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(REVENUE)

		Royal Courts of Justice Strand, London,WC2A 2LL
		27 February 2003

Mr Justice Laddie

Introduction

1. This is an appeal by the Inland Revenue against a Special Commissioner's Decision which was released on 15 July 2002. The respondents, Philip William George and Ivor Bernard Loochin are executors of the will of Elsie Fanny Stedman, deceased. The deceased held 85% of the shares in a company called Dunton Park Caravan Sites Limited ("the Company"). As the Company's name suggests, it owned land on which it ran and provided services to caravan sites. This appeal concerns whether or not the shareholding is subject to inheritance tax. That is dependant upon the scope and effect of ss 104 and 105 of the Inheritance Tax Act, 1984 (the "IHTA 1984").
2. Insofar as material to this appeal, s 104(1) provides:

"(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 that part of the value transferred shall be treated as reduced -

(a) in the case of property falling within section 105(1)(a) … below, by 100% …"

3. The expression "relevant business property" within that section is defined in s 105 which, insofar as relevant, provides:

"(1) Subject to the following provisions of this section…in this Chapter "relevant business property" means, in relation to any transfer of value, -

(a) property consisting of a business or interest in a business,

(b) securities or a company which are unquoted and which either by themselves or together with other such securities owned by the transferor and any unquoted shares so owned gave the transferor control of the company immediately before the transfer;

(bb) any unquoted shares in a company …

(3) A business or interest in a business, or shares in or securities of a company, are not relevant business property if the business or, as the case may be, the business carried on by the company consists wholly or mainly of one or more of the following, that is to say, ... making or holding investments."

4. In accordance with these provisions, the Deceased's shareholding in the Company is treated as relevant business property and benefits from relief from inheritance tax unless the business it carried on consists wholly or mainly of making or holding of investments. The Special Commissioner's decision was to the effect that the company did not carry on a business consisting wholly or mainly of making or holding investments. The result is that the shares in the Company enjoy total relief from charge to inheritance tax under IHTA 1984.

The Company's business

5. The Commissioner's decision contains a description of the business conducted by the Company. It is accepted as being accurate:

"5. …..The Company carries on eight activities which are described in detail in Mrs Purcell's statement but can be summarised as follows.

(1) The residential homes park. At the time of the deceased's death this consisted of 167 mobile homes. The caravans are owned by the residents and not by the company. The residents receive connections to sewerage, water, electricity and, if required, calor gas which is supplied either by bottled gas or by the hire of mini gas tanks. The company arranges bulk supply of electricity and calor gas for resale to residents. All electrical installations on the site after the powerhouse to which the mains electricity supply is made belong to, and are maintained by, the Company. The company reads each resident's electricity meter monthly and invoices residents. The Company recovers the cost of electricity for street lights and the office and club in the charge it makes for electricity to the residents. The Company stores gas bottles for supply to residents and invoices residents for deliveries to the gas tanks hired by the Company to residents. It makes a profit on the supply of electricity and gas to residents. Water is supplied to residents at a fixed charge and is paid for by the Company on a metered basis, on which the company makes a profit. The common parts are lighted, the roads are maintained, there is an emergency telephone, fire hydrants, and a visitors' car park. Rubbish is collected weekly and three large skips for garden rubbish are provided for residents and emptied weekly. Residents can use the general store/newsagent which is let at a concessionary rent and not operated by the Company. Residents pay their own general rates and make their own arrangements for telephones. There are car parking spaces and garages available for hire. There is a full-time site manager. A considerable amount of staff time relates to this part of the business; Mrs Purcell apportioned to it 48 per cent of one member and 10 per cent of another member of the office staff, 40 per cent of two full-time, 50 per cent of another working 30 hours per week, 50 per cent of another full-time that seasonal, and either 40 or 50 per cent of the three part-time, members of the maintenance staff and, 40 per cent of the site manager and assistant site manager. The company takes a commission of 10 per cent on sales of caravans on the site. In addition it sells caravans, making a profit on that activity.

(2) Dunton Park Country Club. This operates from a separate building comprising a bar which is open every evening and a suite available for hire to non-members for private functions. Income is also received from fruit machines. Membership is available for a fee to residents and non-residents of the site. Of the 363 residents in 1997/98 117 were members and there were 62 non-resident members and 16 complimentary members. Residents can use the functions week on one afternoon each week. It is common ground that this activity is not part of a business of making or holding investments.

(3) Caravan storage. There is an area for storage of touring caravans when not in use. Agreements for storage are for fixed periods of six months or a year and related to a specific plot, although the Company can move caravans if necessary, for example for maintenance. At the time of the deceased's death there were 443 caravans stored there. There is 24-hour access via a barrier that is operated by a computerised key fob issued to plot holders. All movements are recorded on a computer in the office. The storage area has a high fence and a security guard there throughout the night. The security guard is not required by the agreements with the plot holders that is commercially necessary and satisfies insurance requirements since all caravans are required to be insured by their owners. Caravans stored in this part cannot be occupied. A considerable amount of staff time relates to this part of the business, Mrs Purcell said that 90 per cent of incoming telephone calls related to it and she apportioned to it 50 per cent of five members of the maintenance staff and one member of the office staff, 40 per cent of the site manager and assistant site manager, and 30 per cent of a further full-time member of the maintenance staff. This aspect of the business is liable to VAT.

(4) the office from which the administration is run.

(5) Warehouse and shop. These are separately let..

(6) Fields. These are let on grazing licences to a farmer.

(7) Insurance. The Company has an insurance agency and received commission on insurance sold to residents and owners of caravans stored on the site.

(8) Interest The Company also receives interest on cash balances which is not regarded as a separate business."

Making or holding investments

6. In Weston v IRC [2000] STC 1064, Lawrence Collins J suggested that s105(3) should be addressed in three steps:

"The questions involved in determining whether the relief is excluded by s105(3) are these: (a) Does the company have investments? (b) Is it 'holding' investments? (e) Does its business 'consist wholly or mainly' of 'holding investments'?" (paragraph 11)

As Mr McKay, who appears for the Inland Revenue, argues, this appeal is not concerned with the second of these questions.

7. The first question is whether there is here an investment In Weston, Lawrence Collins J explained that whether a property right is to be regarded as an investment is to be answered through the eyes of a businessman. In particular he relied on the following extract from the speech of Lord Normand in Tootal Broadhurst Lee Co Ltd v IRC [1949] 29 TC 352:

"The meaning of investment is not its meaning in the vernacular of the man in the street but in the vernacular of the business man. It is a form of income-yielding property which the business man looking at the total assets of the company would single out as an investment." (p 371)

8. Although that passage gives general guidance, for the purpose of this appeal consideration need only be given to the exploitation of rights over land. Mr McKay says that holding land to produce a profitable return on the exploitation of the proprietorial rights in it is always to be treated as holding an investment. Mr Argles, for the respondents, does not dispute this. This, also, is supported by Griffiths v Jackson [1983] STC 184 in which Vinelott J said:

"It is a cardinal principle of United Kingdom tax law that 'income derived from the exercise of property rights properly so called' by the owner of land (freehold or leasehold.) is not income derived from carrying on a trade. The words I have cited come from the speech of Lord Macmillan in Fry (Inspector of Taxes) v Salisbury House Estate Ltd [1930] AC 432 at 468." (p 191)

9. Mr McKay argues that this is an important starting point for the analysis of the facts in this case. One has to identify whether any part of the business consists of making or holding investments before one can get to the third step in Weston and ask whether it is the whole or main part of the business.
10. The third stage in Weston appears to me to be separable into two parts. First, once it has been determined that there is an investment business, it is necessary to identify the scope of that business. Second, it is then possible to compare the investment with the non-investment activities to determine whether the business carried on by the company consists wholly or mainly of making or holding investments. These are considered separately below.

The scope of a business of making or holding investments

11. The main way in which proprietary rights in land are exploited is by levying rent or a licence fee for their use. However, as was pointed out by Lawrence Collins J, there may well be other activities which are carried on which are incidental to that exploitation. They are treated as part of the exploitation. A particularly clear example of this is to be found in Martin v IRC [1995] STC 5. In that case the deceased had carried on a business of owning and letting industrial units on three-year leases at fixed rents. The Special Commissioner said:

"22. In the present case the business activities of Mrs Moore fell into three categories. Firstly, there were those directed at 'making' the investments, those cover the finding of tenants, the negotiations over rent, the granting of the leases and the taking of the decision as to whether to accent a surrender or to allow an assignment … Secondly there were compliance activities which the Moores had to carry out as landlords, such as keeping the exterior painted and in good repair. The activities in those two categories were clearly activities of or attributable to the making or holding of investments. The third category covered the management activities summarised in para 8 above. The Moores were actively involved in these and these continued after Mr Moore's death, though at a reduced level. The purpose of these was to keep up the standards of the whole investment property. But they were in no way productive of any income other than rent, nor were they designed to produce any separate income. This third category of activities covers, in my view, activities that were incidents of the business of holding investments.

23. Thus, active though Mrs Moore's business was, none of the activities that had anything to do with the property were concerned with anything other than the making or holding of investments. To express the point positively, there were all part and parcel of the business of making or holding investments. The property is therefore excluded from ranking as qualifying business property by the words of exclusion in s105(3)"

12. The same point is implicit in The Governors of the Rotunda Hospital v Coman (1918) 7 TC 517, although the case is dealing with different tax legislation;

"... the Governors of the Rotunda are, in my opinion, engaged in the business of letting for reward their rooms heated, lighted and furnished with seats in the manner described in the third paragraph of the Case Stated, and cleaned, managed and regularly controlled by their servant, the keeper, as prescribed by the 19th Regulation, for the purpose of providing, through the operation of those who take their rooms, recreation and amusement to such members of the general public as choose to pay for admission. I do not think the services thus given can be regarded as mere incidents attached to the letting of the rooms themselves." ( p592)

13. It appears to me that what falls within the investment business "bag" is not only the core holding of the land and the receipt of fees or rent in respect of its use, but also all those activities which, viewed through the eyes of an average businessman, would be regarded as "incidental" to that core activity. As Mr McKay puts it, activities which are incidental to the letting of land are not severable from it and take on the investment character of the letting. Activities which have minor commercial justification by themselves are likely to be regarded as part of the business which they support. Thus where it would appear to a businessman that a particular activity was engaged in primarily to support some other business activity, it is to be treated as part of the latter activity. The extent to which such a subsidiary activity makes a profit will be some indication of whether it is a stand-alone business or should be regarded as merely incidental to the business it supports. Put another way, an activity which is incidental to, say, an investment business does not cease to be so because the landlord decides to make an additional profit on it.

Determination of whether the business consists wholly or mainly of making or holding investments

14. Having separated the investment from the non-investment activities, it is possible to determine whether the business consists wholly or mainly of the former. This is not done quantitatively. It is a qualitative assessment which should be viewed through the eyes of the reasonable businessman. The approach is that adopted by Lightman J in Cook v Medway Housing Society Ltd [1997] STC 90:

"… In determining what is the business of a company for the purpose of s 130, it is necessary to have regard to the quality, purpose and nature of the company and its activities, and this includes the full circumstances in which the relevant assets are acquired and retained, including the objects clause in the memorandum of association of the taxpayer and the objects of a society such as the society as revealed in its rules. It is relevant to have regard to the actual activities carried on by the taxpayer at the relevant date, but if these are viewed without regard to the taxpayer's past history or future plans they may give only a partial and incomplete picture. The critical question is whether the holding of assets to produce a profitable return is merely incidental to the carrying on of some other business, or is the very business carried on by the taxpayer. In this case the very business of the society is the provision of housing at a return below the market return, but none the less a return producing a profit."

The Decision of the Special Commissioner

15. Mr McKay argues that the Special Commissioner, Dr John F Avery Jones, instead of approaching this case in the sequence suggested above based on Weston, jumped straight to Cook v Medway. He says that Dr Avery Jones assumed that holding land to produce a profitable return on it is capable of being incidental to the provision of services on the land. What he should have done was to recognise that here the land was held as an investment. After that he would have been in a position to assess not only which, if any, of the other activities carried on by the company were incidental to the investment business, but also whether the latter was "the very business" carried on by the company. In support of these submissions, Mr McKay draws my attentions to paragraphs 22, 30 and 31 of the Decision.
16. For example, paragraph 22 reads as follows:

"I return to the question: is this aspect of the Company's business [i.e. the running of the residential homes park] the holding of land to produce a profitable return incidental to the carrying on of some other business (which in this case is the provision of services to the residents) or is it the very business carried on by the company?"

17. I accept Mr McKay's submission. The approach adopted by Dr Avery Jones allowed him to treat the holding and exploitation of the land as if it were merely ancillary to the provision of services to residents and therefore not the holding of an investment.

Applying the Weston approach to the facts here

18. The business of receiving site fees from each of the mobile home owners for the right to place their vehicles on the Company's land (ie residential homes park facility) and the receipt of fees for allowing others to store mobile homes (ie the caravan storage facility) constitute exploitation of the Company's proprietary rights in its land. They constitute the business of holding an investment. Furthermore all of the services, such as the supply of water, electricity, gas, even though profitable in their own right, were ancillary to that investment business. It appears that some of this may have been conceded before Dr Avery Jones because he noted:

"29 I accept Mr Argles' approach of saying that the investment business is that of making a return on the licensing of the site and the right to use the facilities such as water, drainage and electricity that are connected to the particular site. The remaining items, principally maintenance of the common parts, relate to the provision of services and are not the business of holding investments."

19. In the light of this, was the holding of investments the very business of the Company? In my view it was. Of the four major activities carried on by the Company, only the operation of the Country Club and the caravan sales were not investment businesses. Some feel for the relative importance of these four areas of activity can be gleaned from the figures given in the Decision. They show gross and net profits as follows:

Storage Club Gas and Water Sales & Site fees

electricity Commission

Gross 81,732 17,663 25,175 10,955 65,463 235,327

Profit

Net 14,652 (38,425) 19,975 5,755 60,263 65,893

profit

20. The core and main activity of the Company was the holding of investment in land. I will allow the appeal.