The Trustees of David Zetland Settlement v Revenue & Customs [2013] UKFTT 284 (TC) (01 May 2013)
DECISION
Introduction
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 Section 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 Section 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.
Background Facts
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 property occupied rent free by a beneficiary of the
Trust.
9.
The Directors of Avidpride are JEL Katz and SB Katz, whose registered
office 5-25 Scrutton Street, London EC2. The 31 December 2005 and 2006
accounts record that the company’s ultimate controlling parties are the directors.
The holding in Avid Pride on 22 September 2007 represented all the issued shares
of the company. The principal asset is the freehold interest in a property
known as 96 George Lane, South Woodford, London E18. This is divided into 20
units either let or available for letting to commercial tenants and a car park.
10.
On 22 September 2007, the issued share capital in Mainlegion was 2 ‘A’ ordinary
shares. Its 31 December 2005 and 31 December 2006 Accounts record that its directors
are JEL Katz and SB Katz and that the company rents its investment property to
the Settlement for £119,674 per annum. The holding in Mainlegion on 22
September 2007 of one ordinary share represented 50% of the issued share
capital. The other shareholder in the company at that date was Mrs JEL Katz,
who is the “the ultimate controlling party” of the company as she also has a
beneficial interest in the Settlement and is its trustee.
11.
The assets aggregate value is £6,297,300. This breaks down into unquoted
shares (£1,149,300); residential property (£775,000); business property
(£4,373,000). The latter is Zetland House business tenancies (£3,180,000) and a
portfolio of let properties (1,193,000).
Documents
On 25 March 1971, Dalmore Property Investment Ltd granted
a Lease to David Zetland of Land at No. 32 Paul Street and Nos. 109-123
(inclusive), Clifton Street in the City of London for a term of 20 years for
£75,000. The freehold of Zetland House was purchased by Mainlegion from
Dalmore Property Investment Company Ltd on 9 January 1984. The freehold was
subject to two leases: a twenty year lease from 15 March 1971 to David Zetland
and a 98 year reversionary lease from 15 March 1971. The property was
purchased with the help of a bank loan. One share in Mainlegion and the
leasehold interest in Zetland House were transferred into the Settlement when
it was formed.
12.
From 24 March 1991 on unidentified terms to 24 March 2089, Mainlegion
rented its commercial property of Zetland House to the Settlement. The lease
terms entitled the freeholder to £119,674 rent per year.
Zetland House
13.
Zetland House is a commercial building divided into units which are let
to tenants for different periods of time normally ranging between 1 and 5
years. There is one lease for 36 years granted in March 1972 and two leases
for 15 years were granted in June 1993 and March 1992. There are approximately
51 sub leases. A sample lease was provided to the Tribunal for the tenant
Empowering Learning Ltd showing terms and conditions.
14.
Zetland House started life as a multi-story factory occupied by a few
firms of printers. The property was becoming redundant and had outlived its
original purpose. There was a recession in the economy at the time. Leases
were for very long periods and there were large parts of the property which was
empty. In 1987, 6,074 sq ft were vacant. By 1992 this figure had arisen to
20,190 sq ft and 34,587 in 1993. By 1997, one quarter of the building was
empty.
15.
The gross rent was then approximately £510,000.
16.
Mr Katz is an entrepreneur. His business model was to offer flexible
office space for computer, media and high technology businesses. This required
major changes to the property, both physically and in terms of use and type of
occupant. He made office space more available and reduced the terms of the
lease where there was no break clause, which made rentals more attractive. He
made the offices smaller and in reconfiguring the business lost approximately
15,000 sq ft of letting area.
17. The gross rent and service
charges in the year 5 April 2007 was slightly under £2.4m which is over four
times the level received in 1997. The business model of Mr Katz had clearly
worked.
18.
In order to assist with the running of the building he hired more staff
to provide services and facilities to tenants. The building had a restaurant,
gym, cycle arch, Wi-Fi, portage, 24 hour access, meeting rooms, media events,
outdoor screens for viewing football matches and film shows as well as an art
gallery area. It was run on the basis of a community with regular barbeques
and socials.
19.
By September 2007, Zetland House was split into 53 units and had
between 80-90% occupancy during the course of the year. This high level of occupancy
has been retained over the years. The Appellant attributes this to a flexible
tenancy approach coupled with the additional services and facilities offered to
tenants.
20.
The management of Zetland House is delegated to an independent property management
company called Mylako Ltd (“Mylako”) whose offices are based at Zetland House.
The Principal of that company is Michael Kohn, whose is a director of Mylako
and a chartered surveyor.
21.
Mr Katz is a chartered surveyor. He is based with his wife at New
Malden. They deal with the “general management” of property enterprises of the
Settlement including major repairs, lease renewals, liquidators, agents, solicitors
and insurance among others.
22.
In 2005 a resident porter and a porter/cleaner were employed to work at
Zetland House. Their contract of employment was signed by Michael Kohn of Mylako
(though the actual contract was with Alpha Property Asset Management Ltd, a
company where Mr Kohn worked before setting up his own business). An assistant
porter was employed in 2009. All these employees report to Mr Kohn at Mylako
but are paid by the Settlement.
23.
As explained later, there are others who work at Zetland House and include
Michelle Katz who deals with tenants’ issues, new leases and renewals. Hayley
Kohn, a solicitor, manages legal matters and property manager, Mr Green, who
works in “the management of Zetland House and other properties”.
24.
Mylako deals with all management issues. They have created a Tenants Guide
which lists the following facilities at Zetland House:
(a) Within the basement area:
i. A
coffee shop which was initially ran by the Settlement and now run by a tenant.
ii. A
gallery for hire for photographic and art exhibitions and parties and events
together with film shoots. Michele Katz is the contract person.
(b) Parking/bike
park which is rented for parking bicycles.
(c)
Meeting rooms with wireless Wi-Fi and catering which is available for hire by both
tenants and public.
Lease
25.
Under the terms of the lease provided with Empowering Learning Ltd
(“ELL”) the tenant is obliged to pay service charges and rent. They covenant
to keep the property in good repair, not to alter the premises and on
expiration of the lease to give the property back in the same condition as when
it was first leased.
26.
The landlord agrees to “maintain, repair, amend, review, cleanse,
repaint, decorate and otherwise keep in good repair and tenantable condition”
the common parts which include windows, lifts, entrances, staircases, passages,
landings, toilets, walls, forecourt and car park.
27.
The landlord covenants to keep in good working order and repair “all
sewers, drains, channels, water courses, gutters, rain water and soil pipes,
sanitary apparatus, pipes, wires and cable and supply lines together with all
lifts and lift shafts, heating, and electric installation and lighting of the
common parts” and to employ staff needed for the general management of the building.
There is a covenant to keep the building insured.
28.
The landlord therefore has responsibility for providing a number of
services for the non-demised areas or common parts and for employing staff to
undertake such work.
29.
The property expenditure for Zetland House as shown on 24 January 2008
included the cost for the following: porter’s flat, wages, electrical expenses,
external redecoration electrical expenses, external redecoration and repairs
and internal redecoration including repairs to the roof and signage, utility
bills, general cleaning, lift maintenance, fire safety and professional fees.
30.
For the years 2007 and 2006 the rent received was respectively
£1,744,189 and £1,733,701 with service charges of £354,120 and £379,367. The
total income for these years was £2,343,951 and £2,174,483.
Correspondence and Events
31.
In 13 May 2008, the Appellant wrote to the Respondents stating:
“It
is not possible to consider the claims for business property relief
independently in relation to Zetland House and the holding of shares in Avidpride
Ltd and Mainlegion Ltd … The shares in Avidpride and Mainlegion Ltd are not excepted
asset since they are both held for the purposes of the Trustees property
business”
32.
On 21 November 2008, the Respondents wrote to the Appellants stating
that:
“The
report on the question of the application of business relief forwarded with the
account assumes that all the assets and activities of the Trustees comprise one
composite business for this purpose. I do not think that this is a correct
line to take.
The
three “strands” of the enterprise comprise (a) Avidpride Ltd (b) Mainlegion Ltd
and (c) the remaining assets and activities of the trustees which are held
outside a corporate structure. The companies themselves form business entities
in their own right and must be looked at completely independently of each other
(and anything else). This treatment is implicit in the wording of s.105 (4) (b)
Inheritance Tax Act 1984, which clearly shows that each company is looked at
individually. The directors of the companies and the trustees may be the same
individuals, but they are acting in different and (at least in theory)
independent capacities.
This
leaves the remainder of the assets and activities which are owned and managed
by the trustees to be considered in their own right. The second point at issue
therefore is whether they constitute a business which is not precluded from
business relief by s.105 (3) of the Act.
This
comprises two separate elements (a) Zetland House and (b) the residential
properties included at Part III of the “Schedule of Business Assets” included
with the account” provision.”
33.
On 30 September 2009, the Respondents wrote to the Appellant after their
visit to 96 George Lane and Zetland House and confirmed the following:
“The business of the settlement
is excluded under Section 105(3) IHTA as it is a business that consists mainly
of making and holding investments and dealing in land and buildings …
Our starting point with
Zetland House is that holding land to exploit a proprietary interest in it for profit
falls on the investment side of the line. Although we then look at the
services provides, it is the nature of these services and how they relate to
the investment property that is critical. The level of activity is not the
determining factor.
…
The settlement holds 2 shares,
100% in Avidpride Ltd. The business of Avidpride is similar to that of Zetland
House but with relatively fewer services provided … [T]he shares are not
relevant business property and the ownership of the shares by the settlement is
an investment activity. There is no indication that dividends have been paid …
The 50% shareholding in
Mainlegion Ltd which holds the freehold of Zetland House is similarly an
investment of the settlement contributing to capital value.
Our conclusion therefore,
looking at the business of the settlement in the round, is that the business is
not relevant business property. Whilst the business is actively managed, the
activities are predominantly investment activities or related to investment.
The services that are not investment related are insufficient to make the
business one that is mainly non-investment. Even considered individually, each
element to the settlement’s business (Zetland House, property dealing and the
shares in two companies) would not be relevant business property as they fall
within the exclusions in section 105(3) IHTA 1984.”
34.
The HMRC concluded that the shares were not relevant business property
and the ownership of the shares by the settlement was an investment activity.
The holding of Zetland House was considered an activity of generating income
from rentals and was a business of exploiting property rights and the services
provided were ancillary to that activity.
35.
On 16 February 2010, the Respondents by a Notice of Determination held
that none of the property comprised in the Settlement was relevant business
property for the purposes of Section 104 IHTA having regards to Section 105 (3)
of the said Act.
36.
On 8 March 2010, the Appellant requested an independent review. On 28
April 2010 the decision was reviewed and the assessment was upheld.
37.
The 23 June 2010, the Appellants appealed by Notice against a decision
dated 16 February 2010.
Law
Statute (as at 2007/2008)
38.
The IHTA 1984 provides for charges to tax on a transfer for value. By section
1 inheritance tax is required to be charged on “the value transferred by a
chargeable transfer”. By section 2(1) “a chargeable transfer is a transfer of
value which is made by an individual but is not an exempt transfer”.
39.
Section 64 provides:
“(1) Where
immediately before a ten-year anniversary all or any part of the property
comprised in a settlement is relevant property, tax shall be charged at the
rate applicable under sections 66 and 67 below on the value of the property or
part at that time.”
That ten
year anniversary “value” is the subject of this appeal.
40.
Part V, Chapter 1 IHTA deals with business property.
(a) Section 103 provides:
(1) In
this Chapter references to a transfer of value include references to an
occasion on which tax is chargeable under Chapter III of Part III of this Act
(apart from section 79), and
(a) references
to the value transferred by a transfer of value include references to the
amount on which tax is then chargeable, and
(b) references
to the transferor include references to the trustees of the settlement
concerned …
(b) Section
104 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) [(b) or (bb)] below, by
[100 per cent];
(b) in
the case of other relevant business property, by [50 per cent];
but
subject to the following provisions of this Chapter.
(2) For
the purposes of this section, the value transferred by a transfer of value
shall be calculated as a value on which no tax is chargeable.
(c) Section
105 provides:
(1) Subject to the following
provisions of this section and to sections 106, 108, […] 112(3) and 113 below,
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 of a company which [are unquoted and which] (either by themselves or
together with other [securities owned by the transferor an 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, dealing in securities, stocks and shares, land or
buildings or making or holding investments …”
41.
Cases
(1)
Saloman v Saloman [1897] AC 11
(2)
Scales (HM Inspector of Taxes) v George Thomson & Company Limited
(1927) 13 TC 83
(3)
Salisbury House Estate v Fry [1930] AC 432
(4)
Bartlett v Barclays Bank [1980] Ch 515
(5)
Griffiths v Jackson [1983] STC 184 (Ch)
(6)
Martin and anor (exors of Moore decd) v IRC [1995] STC (SCD) 5 (“Martin”)
(7)
Brown’s Executors v Inland Revenue Commissioners [1996] STC (SCD)
277
(8)
Furness v Inland Revenue Commissioners [1999] STC (SCD) 232
(9)
Weston (executor of Weston, deceased) v IRC [2000] STC 1064
(10) Stedman’s
Executor’s v IRC [2002] STC (SCD) 358
(11) CIR v
George & Loochin as Stedman’s Executors (2003) 75 TC 735
Inland Revenue
Commissioners v George and another (executors of Stedman deceased) [2003] EWCA Civ 1763 (“George (CA)”)
(12)
McCall and another (personal representatives of McClean (deceased)) v
RCC (2009) 79 TC 758 (“McCall”)
McCall v RCC [2009] NICA 12
(13)
Brander (representative of James (deceased), Forth Earl of Balfour) v
RCC (2010) 80 TC 163
(14)
Ramsey v HMRC [2012] UKFTT 176 (TC)
(15)
Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395
(16)
Nicolette Vivian Pawson (Deceased) v HMRC [2012] UKFTT 51 (TC)
(17)
HMRC v Thoresby Lockyer and another (personal representatives of
Nicolette Vivian Pawson (Deceased) [2013] UKUT 50 (TCC)(“Pawson”)
Other materials
HMRC Manual, para. IHTM25263
Witness Statement of Stuart B Katz
42.
The witness statement of Mr Katz was signed in June 2012 comprises approximately
16 pages.
43.
He did not give oral evidence.
44.
The following points were made:
(1)
He is a chartered surveyor and entrepreneur in property development and
the trustee of the Settlement since 1 November 1991.
(2)
He manages Zetland House on a full time basis.
(3)
The original settlor of the Settlement was David Zetland who died in
1991. He is the father of Jacqueline Katz who is his wife. He has three
daughters, Michelle, Karen and Hayley.
(4)
The strategy for Zetland House was described as “akin to the business
of a serviced office whereby the former plan of granting long leases was
reduced to one to five years and, even when there was no break clauses,
consideration and negotiation was undertaken to vary terms to meet the tenants’
requirements”.
(5)
Tenants were from the media and technology sectors.
(6)
The management of Zetland House was described as a “flexible management”
structure.
(7)
Various staff were employed by the Settlement to assist with the running
of Zetland House.
(8)
There are services which are offered to tenants including a gym, Wi-Fi,
security, bicycle spaces and the recycling of waste which is recharged as
service charges.
(9)
The Settlement offers hire of conference rooms, photo shoots and events.
(10) A building
works service is offered to tenants who have special requirement and to make
good leased premises to comply with surrenders or termination requirements.
(11) Remedial
works are undertaken in respect of dilapidations.
Witness statement of Michael Kohn
45.
Mr Kohn is a director of Mylako, the property manager and a short
witness statement was signed on 31 July 2012.
He made the following points:
(1)
Mylako is an independent firm of chartered surveyors offering services
to the property sector. Its services include building and asset management,
investments, sales and lettings. His firm manages commercial properties.
(2)
Their work involves, inter alia, debt recovery.
(3)
They describe themselves as “the first point of contact” for tenants’
problems at Zetland House
(4)
His dealings with Zetland House are less “hands on” since lettings are
not conducted in the same manner as those of other landlords.
(5)
He said that Mr Stuart Katz is known to all the tenants and provides services
to them on a daily basis. He promotes a community spirit at Zetland House and
it is not uncommon for units to be split or altered or added to at the tenants’
requests.
(6)
He confirmed that Mr Katz’s main concern was to encourage high occupancy
and to increase rental returns.
46.
Finding of facts
(1)
The Settlement assets comprise the property in the Schedule of Assets of
the Settlement with the main asset being Zetland House. It is a commercial
building divided into units which are let to tenants for different periods of
time ranging between one and five years.
(2)
Tenants receive services and facilities under their lease as well as
those provided by their landlord which they may or may not pay for.
(3)
The Settlement assets have a combined value of approximately £6 million.
(4)
The Settlement trustees are Mr and Mrs SB Katz. Its beneficiaries the
Katz family. Zetland House is managed by Mylako Limited, an independent
company.
(5)
Mr and Mrs Katz deal with the general management of the property
enterprises of the Settlement. They are assisted by staff members performing
different tasks.
(6)
The tenants at Zetland House have the use of various facilities
including a café, gallery, meeting rooms, bicycle arch parking, Wi-Fi.
(7)
The tenants pay service charges as well as rent to the landlords.
(8)
The Katz family are all actively involved in the management of the
property.
(9)
The business model employed in running Zetland House is more akin to a
short let business with flexible leases. This is attractive to companies at
the start-up stage in the technology and media sectors.
(10) The
business model has been designed to increase occupancy and rental returns.
Discussion
47.
The Tribunal would look at the different strands of the business
separately. The shareholding in Avidpride Ltd and Mainlegion Ltd and the
remaining assets and activities comprising mainly Zetland House.
48.
Whilst the Respondents originally took the view that the business
comprises a single composite business of making and holding investments, they later
explained that the businesses within the companies are separate businesses
which fall even more clearly within the exclusions of s.105 (3) IHTA 1984. This
suggests that the business as carried on by Avidpride and Mainlegion should be treated
as separate.
49.
The separate business approach is consistent with HMRC’s correspondence
on 21 November 2008 where they stated:
“The
Appellants’ advisors’ report on the question of the application of business
relief forwarded with the account assumed that all the assets and activities of
the Trustees comprised one composite business for this purpose. I do not think
this is a correct line to take.”
50.
In taking the separate business approach, it would mean that the core
business carried on by the Settlement, Zetland House, can be viewed separately
from the holding of shares in Avidpride and Mainlegion.
51.
The legislation is clear that a business or interest in a business on
the one hand and unquoted shares on the other qualify on a separate basis for
BPR purposes under s.105 (1) (a) and s.105 (1) (bb) IHTA 1984.
52.
The Tribunal accepts the Appellants’ contention that the unquoted shares
in Avidpride and in Mainlegion fall to be considered as separate business
assets in their own right under s.103(1)(bb) IHTA 1984. The relevant test under
s.105 (3) in relation to the shares is whether the business carried on by the
company qualifies for relief.
53.
The Appellants’ IHT return had summarised the assets held by the Settlement
under the same heading of “Business Assets”. The Tribunal has to look at the underlying
businesses themselves and not at how they have been reported by the Appellants.
The categorisation under the IHT form as” Business Assets” and” Non-business
Assets” may be the result of the forms’ layout.
54.
It is important that this separation is made at the start. The core
business activity under consideration is that of Zetland House and it would be
wrong to look at the other businesses in making a determination on this business
given the greater proportion of time and resources which is attributed to this
asset when compared to the other assets which are more or less passively owned
by the Appellant. The key issue is whether the property comprised within the
Settlement is relevant business property for the purposes of s.104 IHTA 1984 or
whether the Appellant can show that its activities prevent the business from
being “mainly” one of dealing in land or making or holding investments.
55.
The Appellants say that they provide sufficient services to the tenants
of Zetland House that it ought not to be classified as an investment business.
They are active managers rather than purely passive property investors. The
business is therefore not one of “mainly” dealing in land or making investments.
56.
A good place to start is with the common ground between the parties.
First, the parties agree on the length of time to consider prior to the 10 year
anniversary. The parties agree that the Tribunal should look back 5 years (2002)
in order to get a flavour of the Appellant’s business. This is time period
supported by the case of Martin.
57.
The parties agree that when looking at the income and profits from rent
when compared with the income and profits from additional services, it is
important to apply a qualitative rather than quantitative test. It is accepted
that while quantitative consideration may show something, they may not be
determinative. The point is that there must be sufficient non-investment activity
for a business to attract BPR and this must be tested by reference to the
“nature of the activities carried out”.
58.
In the recent Upper Tribunal decision in Pawson the judge
explained that the “relevant test is not the degree or level of activity, but rather
the nature of the activities which are carried out”. This would be in keeping
with the intention of s.105 (3) IHTA. The section requires the Tribunal to
look at the business itself or the business carried out by the Settlement
rather than to look at the nature of the business carried out by the owner or shareholder.
The case George (CA) requires the Tribunal to look at the business “in
the round” with no one factor being determinative.
59.
There is agreement between the parties that the case law in this area
relates to different taxes and different subject matters and one has to be
cautious when applying their reasoning to BPR. It is required to consider all
of the BPR cases in order to get a measure of the level, quality and quantity
of services which would be sufficient to attract BPR. The cases provide a
helpful guide of the approach taken to the treatment of services provided by
the owner. The Courts have relied on cases with very different fact patterns
to evolve legal principles which can be applied in looking at BPR.
60.
The Court of Appeal in George undertook a detailed analysis of
the facts and reasoning in Martin even though George (CA)
concerned a caravan park and Martin concerned industrial units. The
Court of Appeal in McCall looked at a range of cases in deciding a
matter relating to grazing land. The Tribunal therefore has no difficulties in
taking a comparative approach. The Appellants want the Tribunal in particular
to consider the A3 Schedule of services which they have provided to show that
there is sufficient non-investment activity for BPR purposes when compared to
other cases. This information should be considered in terms of its nature,
quality and quantity.
61.
In the case of George (CA) the Court noted that it is common
ground that the exploitation of a proprietary interest in land for profit is in
principle an “investment” activity. There was however, a “wide spectrum” of
activities involved in the exploitation of land. The Court quoted from the
Special Commissioner’s decision where he said:
“It
is not in dispute that the Company carries on a business; the question is
whether it is a business consisting mainly of holding or making investments.
There is a spectrum at one end of which is the exploitation of land by granting
a tenancy coupled with sufficient activity to make it a business, which may be
activity in granting tenancies rather than activity in relation to the tenancy
once granted. At the other end of the spectrum, while land is being exploited,
the element of services means that there is a trade, such as running a hotel or
a shop from premises owned by the trader. Normally for income tax, leaving
aside services for which a separate charge is made, the income must be either
income from land or trading profits. Here the concept of the trade is
irrelevant and one is required to determine whether the business of Company
consists mainly of making or holding investments or some other business.”
62.
There is a wide spectrum in cases involving land exploitation which
makes the cases distinguishable on the facts. Land may be held as an
investment where profits are derived from its use even where the landlord has
to undertake maintenance and management required by the lease or incidental to
the letting. In other cases, the activities carried out may be incidental to
some other business or one of a number of businesses carried on by the
landlord. The nature and purpose of the activities must be carefully examined.
Clearly business which requires a high level of provision of services such as a
hotel or a residential home and where the tenants are paying separately from
the use of the land then those can be considered a business which is not the
holding of investments.
63.
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.
This 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.
64.
In the case Martin, which concerned non-residential units, the
court accepted that if additional services such as cleaning and security had
been offered then that “might have tipped the balance” which suggested that if
the Appellants had done more in that case they could have qualified for BPR. The
bar was set low in this case.
65.
The parties also have areas of disagreements. The first area of
disagreement concerns what can be called the starting point of the discussion.
In the case of Pawson the Court indicated a starting point as:
“…
the proposition that owning and holding of land in order to obtain an income
from it is generally to be characterised as an investment activity.” (para.42)
66.
In support Carnwarth LJ in George (CA) said:
“In
the case of a building for letting, [additional services or facilities provided
to the occupants are] unlikely to be material. They will not be enough to
prevent the business remaining “mainly” that of holding the property as
investment.” (para.27)
67.
The Respondents say that the correct starting point is the assumption
that the property business will not qualify for BPR and the Appellants must
show that sufficient additional services and facilities were provided to rebut
that presumption.
68.
The Appellants say that approach is wrong. They say that that the vast
majority of residential and business landlords will generally provide their
tenants with nothing more than the lease to the property and in such cases any
additional services are unlikely to be material. The landlord would do the
minimum required under the lease and collect the rent.
69.
The Appellants say that Zetland House is a different business
enterprise. First, the Trustees are not typical landlords because of the
additional services made available to the tenants. The business model used by
Mr Katz in developing the business is that of “serviced offices” which the
Appellants say is “more akin to that of a hotel than to that of a typical
office letting”. The Appellants suggest that the correct starting point is for
the Tribunal to keep an open mind and review the whole business and not start
with any particular assumption. The whole spectrum of businesses should be considered.
70.
The case law is helpful in understanding the approach. The cases
suggest that where income is derived from property rights by the owner of the
land, whether a freeholder or leaseholder, then that is not treated as income
which is derived from carrying on a trade but rather as income which arises
from a business. The business is that of the letting of property and the
Court’s view is that the income arises from the exploitation of land rights.
71.
In the case of Griffiths v. Jackson [1983] STC 184, an income
tax case, which concerned a partnership which had acquired 11 properties for
letting as furnished rooms to students where the students shared communal
facilities but could not sublet the property. Laundry and cleaning facilities
were provided. The business was short term letting to students and tourists with
the provision of connected services. The Court said that the activities of
selecting and finding tenants, preparing rooms for letting, providing TV sets
and other facilities required including inventories and provision of linen
constitutes the carrying on of a business.
72.
In Martin, the Special Commissioner looked at a business which
involved owning and letting of industrial units on 3 year leases at fixed
rents. The question was whether the business of an active landlord could be
described as “wholly or mainly the making or holding of investments”. The
landlord undertook repairs and maintenance of the building, painting and other
maintenance of the common parts which included dealing with parking and
rubbish, advertising and interviewing prospective tenants and negotiated lease
renewals and complaints. In addition they ensured that the occupants had
insurance cover which the Court viewed as an unusual term.
73.
The Special Commissioner noted that:
“Where
… the value transferred by a transfer of value is attributable to let property,
entitlement to business property relief depends on the 2 tests in s.105 being
satisfied. The Appellant has first to show positively that the let property is
compromised in a business (s.105 (1) (a)); then he has to establish at the
second stage that the business does not consist wholly or mainly of the making
or holding of investments (s.105 (3) … I still have to determine the essential
nature of the business before proceeding to the second stage.”
74.
The Judge did not accept that a distinction can be drawn, under the
legislation, between an active and passive landlord. The words “holding
investments” was not confined to passive investments. The question is whether
anything other than the lease produces income and is it sufficient to “tip the
balance” in determining whether the business consisted wholly or mainly of the
making or holding of investments. It is this tipping of the balance which the
Tribunal must ascertain by looking at the actual features of the business
undertaken.
75.
The Tribunal acknowledges that with Zetland House the business is not
simply the receipt of rent from let property. There is the provision of certain
services and activities. The question is whether those services and activities
elevate the business from mere ownership or mere investment into a business
which is relevant for business property relief purposes.
76.
The Tribunal must not start with the fact that the business consists
entirely of the ownership of land giving rise to investment activity. It must
be mindful of the broad spectrum of businesses and the fine distinctions
between different businesses. The better approach is for the Tribunal to have
an open mind and not to pre-judge the issue at the start. There are clearly
activities which are attributable to the holding of investments and there are
activities that produce income separately from rent and which are not part of
the investment holding activities.
77.
The second area of disagreement between the parties concerns services
and activities. The Tribunal must decide whether the business consists of
sufficient non-investment activity which would qualify for business property
relief. In Martin, the Court decided that certain core activities
were all “part and parcel of the business of making or holding investments.” Consequently
the business was excluded from ranking as qualifying business property by the
words of exclusion in s.105 (3) IHTA 1984. The activities identified were:
(1)
activities directed at making investments which is to say finding
tenants, negotiating rent, granting of leases and dealings with surrenders and
assignments;
(2)
compliance activity which the landlord will have to carry out to comply
with the terms of the lease including external repairs; and
(3)
activities that are “incidents” of the business of holding investments
which includes management activities such as dealing with complaints,
advertising and interviewing prospective tenant.
78. These activities were more
connected to the lease and related to the property ownership. They were
therefore in the nature of investment activity.
79.
The Appellants say that they do not rely on any of the above precluded
categories of services or activities. They say that the provision of
additional services and facilities itemised in their A5 Schedule are the
relevant consideration. The fact that the itemised services are available to
members of the public supports their view that they are separate from those
provided under the lease. The Respondents say that the “purpose” of providing
the services listed in A5 Schedule is not, as the Appellants contend, based on
a serviced office business model, but rather to increase occupancy and increase
the rent collected under the lease. They say the Appellants are in effect
“active managers” of Zetland House and the services are incidental to their
core activities.
80.
The Appellants refute this submission. First, they say that the purpose
test finds no support in the authorities and is wrong as a matter of law. The
authorities are clear that services such as those provided by the Appellants
are relevant, non-investment activities. They point out that Carnwarth LJ in George
(CA) said that the term “management” is not to be extended to “additional
services or facilities provided to the occupants such as those referred to by
Slesser LJ (i.e. cleaning, lighting, heating and other services severable from
the tenancy) whether or not they are included in the lease and covered by the
rent”.
81.
The Appellants say that it is not relevant whether or not the tenant
pays under the lease for the services and facilities. They draw reference to
hotels where the additional facilities provided are to increase occupancy rates
and charges but the business qualifies for BPR. In the Appellants’ view it is
wrong for the Respondents to argue that the Tribunal should ignore the café,
gym and hair salon because these businesses are owned and operated by others. Again,
using the hotel analogy it is not uncommon for hotels to bring in outside
operators to run restaurants and spas, for example, and still qualify for BPR.
The point is well made but there are important differences between the letting
of offices and a business of running a hotel. A guest in a hotel does not sign
a lease with attendant obligations nor have exclusive occupation for a fixed
period of time. The tenancy is fundamentally different and the services are
less personalised. The Appellants draw reference to a statement by Henderson J
in Pawson where he said:
“It
is clear from George that the provision of these additional services and
facilities (i.e. cleaner, heating and hot water, television, telephone, and
being on call to deal with emergencies, welcome packs, etc… is not to be
regarded as part of the maintenance of the property as an investment, and that
their categorisation as services is unaffected by the fact that no separate
charge was made for them.”
82.
In furnished lettings or holiday lets, the owner is substantially
involved with the holidaymaker in relation to activities on and off the premises.
This is not the case with commercial office space.
83.
It is not disputed that the Settlement provided more to their tenants
than most landlords. The motive is to keep occupancy and rentals at a high level.
Mr Kohn, the property manager, in his evidence confirmed that the Appellants
were able to charge 10% more rent because of the additional facilities offered
to tenants.
84.
The Appellants say the Settlement was involved in producing all manners
of turnover in addition to rent. This includes income generated from project
management of building works which were charged separately and undertaken to
meet particular clients’ requirements. There is a distinction between the
letting of units in a commercial building and businesses where the owner
provides services as part of a trading activity. For example, letting plots in
a caravan park involves site owners looking after the welfare of residents on
the site and staying in active contact. The only investment element is the
granting of the right to station the mobile home on the plot and the connection
to services. Everything else provided is non-investment and produces a profit
in its own right. The tenants in an office building in central London who manage independent businesses are not normally as dependent on the landlord.
85.
The Respondents say having additional services does not prevent the
business from being an investment. These services are ancillary to the main
investment which is the exploitation of the real estate for rent. The nature of
the income which has been derived from the activities is rent. The capital
assets contained in the Settlement are used in the activity of generating
income from rent or from holding property for resale. None of the assets are
specifically for the purposes of providing services. Zetland House is not a
business of providing services but rather for exploiting property rights and the
service provision, such as it is, is ancillary to that activity.
86.
The activities which the landlord carries out or is obliged to carry out
under the terms of the lease would be incidental to the tenancy. Properly
speaking, such activity would fall to be considered as part of the holding of
investments. Any activities which the landlord carries out for which he
receives no separate consideration, although not required under the lease,
would normally be incidental to the holding of property as an investment. Where
the landlord carries out activities or provides services which are not required
under the lease and for which separate payment is made then these, by their
nature, would seem to be activities which are non-related to investments. The
Judge in Pawson provided interesting guidelines in this respect. He
said:
“It
is clear from George that the provision of these additional services and
facilities is not to be regarded as part of the maintenance of the property as
an investment, and that their characterisation as services is unaffected by the
fact that no separate charge was made for them. The critical question, however,
is whether these services were of such a nature and extent that they prevented
the business from being mainly one of holding Fairhaven as an investment. Carnwarth
LJ made in clear in paragraph (27) of his judgment in George that, in
the case of a business of letting a building, the provision of such services is
“unlikely to be material” because it will not be enough to prevent the business
remaining mainly one of property investments. The implication is that in any
normal case an actively managed property letting business will fall within the
exception in s.105 (3) because the “mainly” condition will still be satisfied.”
87.
He goes on to say that the business was mainly one of investment and he
observed in paragraph 46:
“The
services provided were all of a relatively standard nature and they were aimed
at maximising the income which the family could obtain from the short term
letting of property. Looking at the business in the round, there was in my
view nothing to distinguish it from the actively managed furnished lettings
business of a holiday property, and certainly no basis for concluding that the
services comprised in the total package preponderated to such an extent that
the business ceased to be one which was mainly of an investment nature.”
88.
The word “mainly” suggests a proportionate test.In the case of a
building let to tenants there are services which must be provided under the lease
and managing the property as an investment. This must be balanced against
additional services of facilities which are provided to the tenants whether or
not they are covered in the lease and by the rent. In the case of a let building,
these additional services would not be significant. The question is – are they
sufficient to prevent the business being “mainly” that of holding property as
an investment.
89.
This leads us to the next area of disagreement which is whether the
Appellants provided sufficient additional services and facilities to make the
business a non-investment activity or to “tip the balance”. The answer is –not
if it is of a standard nature or aimed at maximising income from the property.
90.
Ms McCarthy for the Appellants provided a useful A3 Schedule which
analyses the services offered in this and other BPR cases. The Schedule is
colour coded with the names of the cases at the top and the services divided
into investment services and non-investment services. The investment services
follow the pattern in earlier cases of making investments, compliance and
management activities. The non-investment activities or services include
cleaning, heating, telephone, television, internet and cafe and appear to be
over and above services normally provided to tenants.
91.
The services and facilities which are submitted by the Appellants and Mr
Katz’s Witness Statement as being additional are as follows:
A. Conference rooms
The
tenant hires out conference rooms at Zetland House for a profit with optional
catering facilities. The rooms are for internal and external meetings and a
charge of £20.00 per hour is made.
Mr
Katz in his witness statement states:
“The
rooms are in the vicinity of the café and have Wi-Fi access, air conditioning,
telephone and flipcharts. A projector can be supplied although most of those
booking the room now use their own laptop computers.”
The rooms are booked between 2 and 3
days per week on average.
B.
Mail Room, Reception and Porters
There is a mail room available
for tenants at Zetland House with receptionist facilities.
The receptionist who runs the
mail has the following duties, as itemised by Mr Katz in his witness statement:
“…
frequent inspections of the common parts and facilities, sorting and
distributing mail, maintenance of parking, visitor logging, supervision of site
staff including day-to-day security issues, incident recording, reviewing
procedures to take account of various operational requirements, liaising with
tenants regarding operational issues, liaising with contractors and other
representatives of outside organisations, maintaining all management and
statutory documentation, manuals and records and a database of approved
contractors.”
There are two Porters, one
full time and one part time. There is a part time porter works on Thursdays
and Fridays. The Head Porter has been employed since 1981.
C.
Staff
There are several staff who
are employed either on a full time or part time basis. These can be itemised
as follows:
(a)
Mr S Katz who works at Zetland House for two days per week. He works
from his office at New Malden on various matters relating to Zetland House.
The Appellants say that Mr Katz works full time on Zetland House business.
(b)
Michelle Katz is based full time at Zetland House. She handles matters
such as day-to-day issues with tenants including short term lettings, rent
issues, alterations to leases and renewals of leases. She is also responsible
for organising events, marketing and branding of the building, including web
design, Twitter and Facebook.
(c)
John Hughes is employed by the Settlement as a relief porter, fire
officer and general handyman. Approximately 50% of his time is in relation to
Zetland House matters.
(d)
Nick Green, a property manager is employed by the Settlement to work
with and assist the trustees with the management of Zetland House and certain
other properties. In addition he provides assistance with the refurbishment of
units, obtaining estimates, sourcing products, overseeing works and dealing
with contractor issues. He is not engaged full time with Zetland House matters
but spends about two-thirds of his working week at Zetland House.
(e)
Hayley Kohn is an in-house solicitor based at Zetland House. She
handles all legal matters relating to tenants, including licence granted for
alterations. Approximately 70% of her time is spent at Zetland House and her
works covers the preparation of new leases and liaising with external
solicitors. She works with Eddie Biber, who deals with leases for Zetland
House.
(f)
Claire Turner, a secretary working at New Malden is employed by the
Trust and deals with meetings and minutes for the secretarial matters. She
spends approximately 75% of her time dealing with Zetland House matters. She
left the company in 2009 and was not replaced.
(g)
Debbie Gaynor is a secretary working at the New Malden Office. Her job
involves answering telephones, taking conference room bookings and
approximately 40% of her time was spent on Zetland House matters.
The staff list suggests that
the Appellant employs approximately “7 to 8 full time staff (plus Mr Katz) and
4 part time staff over 5 years prior to the 10 year anniversary of the Trust on
22 September 2007”.
D.
Café
The Trustees have in the past
made available a café which is now operated by a tenant but we are told with
the support of the Trustees. The café itself opened in 2000 with small seating
capacity. The 2003 to 2005 accounts show that the café while operated by the
Trust had a turnover of £16,712 in 2002, £10,498 in 2003 and £7,027 in 2004.
In 2005 it was decided to wind up the company running the café and hand over
the management to an external tenant. The café though run by an independent,
has the support of the Trustees who provide “financial help and business
advice” to the current café owner. The decision to have the café was a
management decision.
E.
Communal events
The Trust organises Barbeques
in summer and Christmas events where tables and chairs are set out and free
food and drink plus entertainment is provided. These events are normally at
lunchtime and last for approximately one hour. At Christmas there are carol
services. These events are social events for the tenants.
F.
Internet services
The computer facilities of the
café are owned by the Trustees and they fund the Wi-Fi access in the café. Wi-Fi
is available throughout the building provided by a telecom provider for which a
share of revenue is paid to the Trustees. In the two years to 22 September
2007, the Settlement received income from the internet of £4,000.
G.
Bicycle stands
In June 2005 the Trustees
installed bicycle parking at Zetland House. This facility is at the rear of
the premises on the ground floor and is a covered stand in the secure enclosure
with 24 hour CCTV. It is provided at a cost of £5.00 per week per cycle. The
Trustees hire bike park spaces to tenants for an additional charge not included
in the tenancy agreement. In the two years to 22 September 2007 the bicycle
stands produced income of £10,000.
H.
Project management
The Trustees undertake and/or
provide project management for building works at the request of Zetland House
tenants. This includes knocking down walls, making units bigger or smaller,
providing air conditioning and other alterations which are outside the scope of
the tenancy agreement and for additional consideration. The Trustees have an on-going
business relationship with contractors who provide services. This enables the
Trust to maximise its profit from any building works by engaging suppliers on
more favourable terms. The Trust would also undertake works for tenants who are
obliged to make good the premises before leaving.
I.
Cleaning services
The Trustees provide cleaning
services to tenants. Offices are cleaned of recycling and waste on a daily
basis, which is paid for through the service charges.
J.
24 hour security
There is a 24 hour security on
site. The building has several entrances and vehicular access through the main
gates including loading and unloading which are all supervised by the porter on
duty. In addition there are approximately 100 visitors a day, which is recorded
and monitored on CCTV cameras.
K.
Gym and hair salon
On the premises there is a
gym and a hair salon both of which are available to members of the public as
well as to tenants and these are run by the tenants and not by the Trust. There
is a reception and administration support for photocopying and faxing and
communal fully equipped kitchens for smaller units.
92.
The Appellants say that the extra services and facilities provided are
substantial. Given the nature and extent of the services to the tenants,
Zetland House should qualify for BPR.
93.
The Appellants dispute the proposition that over 50% of the income or
staff time must be attributable to additional services is to qualify for BPR.
There is no general rule that a business involving office space can never
qualify for BPR and there has been no objection by HMRC to that submission.
94.
In the absence of HMRC identifying particular additional services and
facilities that would be sufficient in the office context, the Appellants say
they have done enough to show that the business is other than an investment
business. Further, a family run business is more likely to qualify for BPR
since they are the owners of the business. It is accepted that it is the
nature of the business not the nature of the proprietor and the business is no
altered because the proprietor is a Trustee.
95.
The Appellants draw reference to Carnwarth LJ in George (CA)
(para.61) who concluded that a family run caravan park did qualify for BPR. He
said :
“I
am happy to arrive at this conclusion. I find it difficult to see any reason
why an active family business of this kind should be excluded from business
property relief, merely because a necessary component of its profit-making
activity is the use of land.”
96.
The Appellants also draw a comparison with a hotel which like Zetland
House derives most of its income from rent and most of the floor space is taken
up for letting of rooms and offers a variety of facilities to its guests. The Appellants
refute the comparison with the Pawson case insofar as the services
provided by the Appellants would certainly “tip the balance” when compared with
the services offered in the Pawson case.
97.
Was there a profit making motive? In his witness statement, Mr Katz made
the following observation at paragraph 11:
“My
strategy was akin to the business of service offices whereby the former plan of
granting long leases (15 – 30 years) was reduced to 1 – 5 years and, even where
there were no break clause, consideration and negotiation was undertaken to
vary terms to meet the tenants’ requirements. In many instances the occupiers
upon expiry of their tenancy were granted licenses from month to month. As a
result of the Trustees’ new strategy of changing the nature of the business, some
15,000 sq ft lettable area was essentially sacrificed to facilitate this
change, but the income return noticeably increased. The gross rent and service
charge in the year to 5 April 2007 was slightly under £2.4million, which is
over 4 times the level received in 1997, an increase which is far in excess of
any inflation in office rent over that period.”
98.
The clear intention of Mr Katz was to exploit the real estate to
increase return. He hired more people, reconfigured the offices and
consequently the occupancy and rental return increased. He had a more flexible
approach to the rental of property and management. He further noted (
paragraph 21):
“Composition
in the market for commercial premises is ever increasing which is why the
Trustees are continually searching for ways to make Zetland House more
attractive.”
99.
Mr Kohn in his witness statement and his oral evidence acknowledged that
accommodating the wishes of the tenants was vital to increasing the occupancy
rate. He said that maximising returns was one of the key objects.
100. There were
several staff employed at Zetland House but there are no timesheets to show the
amount of time they spent working on Zetland House matters and no contracts of
employment (except Porters). The tasks undertaken by staff are varied and flexible.
A substantial amount of the wage bill went on the Porters. The figures for
Zetland House given for the year end 2006 shows that wages and salaries
totalled £81,933 and porter’s flat and wages £49,206.The Head Porter was paid
by the Settlement but reported to Mylako. He lives in a flat at Zetland House.
The Porter/Cleaner is paid by the Settlement but reports to the Head Porter.
From 2009, there was an Assistant Porter who reports to Mylako. We are told
that they spend 100% of their time at Zetland House. Their tasks include cleaning,
inspection of common parts, car park maintenance, visitor login and liaising
with tenants and management.
101. There are other
people described as “staff” at Zetland House. This includes a secretary, Ms
Turner, who works at New Malden and Mr Biber, a contracted solicitor who deals
with leases. Mr Green, a manager, who is not full time. Miss Gaynor is the
“contact” for meeting rooms and Michelle Katz is the “contact” for the gallery.
Ms Gaynor, a secretary and Mr Hughes, a relief porter, are employed by another
Group company and recharged within annual management charge. Michelle Katz
(marketing), Hayley Kohn (Solicitor) and Nick Green (Property Manager) do not
appear to be employed by the Settlement. In terms of direct line reporting,
the Tenants’ Guide states that Zetland House is “managed” by Mylako Limited and
it is the “first point of contact” for tenants. Mr Kohn’s email contact is
given to the tenants.
102. The Tribunal
finds that the information regarding staff as presented by Mr Katz in his
Witness Statement, cannot be corroborated. The picture which emerges is that
not all staff are employed by the Settlement and it is unclear (except with the
porters and cleaners) the percentage of time spent by staff on Zetland house matters.
There are no time sheets or contracts. A majority of the employees seem to
perform tasks concerned with the management of the investment. It is accepted
that some services and facilities are provided by staff which are non–investment
related, such as, the cleaning of common parts, post sorting services and
delivery, reception, food and gift vouchers. The great majority of the other
services seem to be directed at maintaining or enhancing the capital value of
the property and obtaining a regular income from its letting.
103. What about
income and profits from non-investment activities? The overall income rental
income of £1,744,189 and £1,733,701 and service charges of £354,120 and £379,367
in 2007 and 2006 respectively and totalling £2,343,951 and £2,174,483
respectively is substantial. The income from “ sundry” activities (including
Brazilian lunch, computer course, carol singing and Christmas parties) in the
two years prior to 22 September 2007 was as follows:
Room hire £14,300
Bicycle Stand £10,000
Filming £2,000
Internet income £4,000
This comes to approximately £30,000. Further figures
were provided by the Appellants for the years 5 April 2006 and 2007 as follows:
2006 2007
Service charge £379,367 £354,120
Dilapidations - £200,722
Rent (Rutland House)
£1,733,701 £1,744,189
Other
(including conferences £61,415
£47,920
and
café)
These
“other” figures do not tally with the figures provided in the Appellants’
letter to the Revenue dated 4 August 2008 of £30,000.The sundry income, either
way, is not substantial when taken as a percentage of overall income.
104. The gym was
started in July 2010 and the bicycle stand produced £5,000 of income in 2007. The
conference/shoots/galleries/exhibition and room hire income figures were not available.
The income generated by these additional services and activities is nominal.
The figures for all service charges, includes services and facilities recharged
to tenants, as a percentage of the rental income is low being less that 25%.
The issue is the relative importance of the non –investment activities to the
business as a whole, not the importance of the individual services and
facilities taken separately.
105. While the
Appellants say that there is no case law which says 50% satisfies the “mainly”
test, it stands to reason that if one starts with 100 then more than half would
be considered to be “mainly”. The breakdown of the figures to 2007 show that
the rental income is the main income. The area of the building given to tenants
(104,000 square feet of the 140,000 square feet) is also substantial and is
more than that allocated to other activities. The gym, café and hair salon are
run by tenants and not the Settlement. While the financials or a quantitative
assessment is not determinative, the analysis of the figures points to an
investment business. Qualitatively, the business has to be looked at in the
round without giving predominance to any one factor in determining whether the
business consists mainly of investments. If the “mainly” test is satisfied then
the whole business qualifies for BPR. The investment side is not discounted in
favour of the non-investment part and the idea is not to put each set of
activities in separate “bags”. The test is simply used to identify the main
business of the Settlement. The Appellants point to an actively managed
business but the activities are predominantly investment activities or related
to investment. The services which are not investment are insufficient to make
the business one that is mainly non–investment.
106. The provision of
services and facilities to a property business will usually be ancillary to the
main business. In the Pawson case the Judge explained that “where the
business is one of letting a building, the provision of additional services or
facilities to the occupant is unlikely to be material” because they will not be
enough to prevent the business remaining mainly one of holding the property as
an investment. He went on to observe that in a normal property letting
business the “provision of additional services or facilities of a
non-investment nature will either be incidental to the business of holding the
property as an investment, or at least will not predominate to such an extent
that the business ceases to be mainly one of holding the property as an investment.
This seems to represent the position here since the non-investment side seems
incidental to the core business.
107. In the sample
lease with ELL, the service charges have 11 parts which includes electricity,
staff, soap, towels, insurance, fees for management, sinking fund,
professional advisors, payments to the superior landlord for repair, cost of
complying with legislation and regulations and VAT. The expenditure itemised
in the property expenditure schedule (approximately 11 pages) of 2006–2007
shows property expenditure by the landlord. The breakdown shows, inter alia,
wages, internal and external repairs, plumbing, signs, roof repairs, security,
electricity, telephones, water rates, refuge collection, fire alarms, boiler
maintenance and professional fees. It is clear that a significant amount of the
expenditure is concerned with the landlord’s obligations to the tenants under
the lease. The landlord would have to employ staff to meet their lease and
management obligations and clearly this was done.
108. The Tribunal
does not accept the Appellants submission that Mylako is concerned with
management and the staff are largely concerned with active management and
creating income which is non-investment related. In the round the landlord incurs
expenditure which includes the making of investments, compliance and management.
It is correct to say that Mr Katz had a vision for a different type of
management and that he structured the property as shorter term lets where
tenants operated in a more communal environment with shared services and
facilities offered by the landlord which were in the lease. However, to a large
extent there was no separate income from those activities. What then was the
purpose of the activities? In the Tribunal’s view these were largely to
improve the building and its fabric and to keep the tenants there and to keep
the occupancy rates high. In the Pawson case the bar has been set quite
high. The facts do not get the Appellants over the bar. The services provided
were mainly of a standard nature aimed at maximising income through the use of
short term tenancies.
109. A comparative
review of the case law shows that the Appellants provided several services and
facilities to tenants. However, we are dealing with short term commercial lets
rather than caravan parks, letting of grass fields, industrial units and
holiday cottages. In those cases, there is more of a management function
required. When the non-investment activities in relation to Zetland House are
looked at closely, the conclusion is that they are primarily concerned with
increasing the return from the building. They have sought to do this by
providing a flexible management, shorter leases, and tenants who can provide
café facilities, gym and a hair dressing salon among others. In contemporary London where many people cycle to work, there is a cycle rack which is safe and monitored.
Tenants feel part of a larger community and there are communal social
activities where tenants are introduced to each other and the landlord is
helpful in accommodating flexibility by providing services for expanding space,
movement and alterations at competitive prices. However, the reality is that
most of these activities generate rental income.
110. The income from
the cycle rack and gallery as well as the coffee shop, hairdressing salon and
gym is all rental income. The tenants rent office space in a large building.
They are some services which are provided over and above that which is required
to be provided. This includes cleaning of the common parts, post sorting and
delivery, reception, free food and drink at socials and gift vouchers. It
would be difficult to classify security as something which is over and above a
landlord’s responsibility especially in London and where a building is open
late at night and early morning. However, these do not tip the balance in
favour the Settlement nor are they sufficient to rebut the “mainly” investments
argument.
111. The Tribunal
would now look briefly at the property portfolio. The properties contained in
this portfolio comprise interests in 11 residential properties and one property
which is occupied rent free by the beneficiary of the trust. These are all
income generating from rentals and from resale. These are clearly held as
investments.
The
business of the Settlement in the round is not considered a relevant business
property. It is accepted that the business is actively managed and there is a
different relationship between the management and the tenants. Mr Katz is a
good businessman. However, the services which are not investment related are
not sufficient to tip the balance in favour of obtaining business property
relief.
Avidpride Limited
(“Avidpride”)
112. The directors of
Avidpride are JEL Katz and SB Katz and the registered office is at 5-25 Scrutton Street. The accounts for the year end December 2005 and 2006 show that the company’s
ultimate controlling party are the directors.
113. The principal
asset of the Company is the freehold interest in a property known as 96 George Lane, South Woodford, London E18 which is divided into 20 units either let or
available for letting to commercial tenants and a car park. The shares in the
company are held by the Settlement. The value of the property held by
Avidpride, less outstanding loans and tax on inherent gains is put at
£430,000.
114. A valuation done
in 2007 put the freehold at £1,050,000 in the open market. The property itself
is described as “functionally obsolescent” with many of the tenants using the
premises on short term licence agreement. The rental income from the 20 tenants
is approximately £175,000 per annum.
115. The Settlement
owns the two ordinary shares in the company. In 1991 it acquired a 50%
interest in the building. In 2004, it acquired the 50% balance in the
building for £800,000. The accounts show that the directors get approximately
£30,000 per year.
116. There is nothing
to indicate that the directors do anything over and above that which a normal
landlord would do. They provide even fewer services than that provided to
Zetland House and on the basis of this the shares cannot be considered relevant
business property and the ownership of the shares by the Settlement would
therefore constitute an investment activity. They would therefore fall within
the exclusions in s.105 (3) IHTA 1984 as shares in a company where the company
is wholly or mainly concerned with investments.
Mainlegion
Limited (“Mainlegion”)
117. The directors of
this company are Mr and Mrs SB Katz. It owns the freehold of Zetland House and
rents it to the Settlement for £119,674 per annum. It has two A ordinary
shares of which one is owned by the Settlement. While Mainlegion owns the
freehold in Zetland House, the ultimate controlling party is Mrs JEL Katz, who
has a beneficial interest in the shares of the company. She also has a
beneficial interest in the Settlement.
118. From the rent
receivable, the company pays directors remuneration of £20,000 and declares no
dividend income. The value of the underlying asset contributes to the value of
the assets held within the Settlement. The holding of these shares is an
investment for the Settlement.
Conclusion
119. The Appeal is
therefore dismissed.
120. This document
contains full findings of fact and reasons for the decision. Any party dissatisfied
with this decision has a right to apply for permission to appeal against it pursuant
to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009. The application must be received by this Tribunal not later than 56
days after this decision is sent to that party. The parties are referred to
“Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)”
which accompanies and forms part of this decision notice.
Dr K KHAN
TRIBUNAL JUDGE
RELEASE DATE: 1 May 2013
