John Best (Executor of the Estate of Alfred William Buller deceased) v Revenue & Customs [2014] UKFTT 77 (TC) (13 January 2014)
DECISION
Background
1.
Alfred William Buller deceased (“the Deceased”) died on 1 December 2007.
At the time of his death there was a deemed transfer of value for the purposes
of inheritance tax of property including 25,000 shares in Bullick Developments
(1986) Limited (“the Company”).
2.
The Company owns and manages the Valley Business Centre (“the Business
Centre”) in Newtownabbey, County Antrim. The Business Centre comprises land and
buildings on an 8 acre site which are occupied for office and light industrial
use.
3.
On 31 January 2012 HMRC determined, pursuant to section 221 of the
Inheritance Tax Act 1984 (“IHTA 1984”) that the shares in the Company were not relevant
business property for the purposes of section 104 IHTA 1984, having regard to
the provisions of section 105(3). That determination was upheld following a
statutory review on 18 May 2012.
4.
The appellant is the executor of the estate of the Deceased. By notice
dated 21 June 2012 the appellant sought permission to appeal out of time and,
subject thereto, appeals to this tribunal against the determination. The respondents have not objected to the application
for permission to appeal out of time and we grant permission accordingly.
5.
The principal issue on this appeal is whether the business of the Company
consists wholly or mainly of holding investments. If that is the case, then the
value of the business reflected in the shares would not qualify for relief as
“relevant business property” under section 104 IHTA 1984. Put briefly, the
appellant contends that the nature and extent of services provided by the
Company to occupiers was such that the business of the company was not mainly
the holding of investments.
6.
We set out below the relevant statutory provisions followed by our
findings of fact based on the evidence before us. In our decision we consider
the submissions of both parties.
Statutory Provisions
7.
For present purposes it is sufficient to set out the following statutory
provisions.
“ 104. The relief
(1) Where the whole or part of the value transferred by a transfer of
value is attributable to the value of any relevant business property, the whole
or 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;
…
but subject to the following provisions of this Chapter.
…
105. Relevant business property
(1) Subject to the
following provisions of this section ... “relevant business property” means, in
relation to any transfer of value, —
(a) property consisting
of a business or interest in a business;
(b) …
(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 or shares, land or
buildings or making or holding investments.”
8.
It was common ground that the shares were unquoted shares within section
105(1)(bb). It was also common ground that relief is available unless the
business carried on by the Company consists wholly or mainly of holding
investments.
9.
Subject to section 112 IHTA 1984, relief is provided on an “all or nothing
basis”. The property in question is either relevant business property, or it is
not. However even where shares are relevant business property, the relief
available is reduced by the value of any “excepted assets”. Section 112(2)
provides as follows:
“An asset is an excepted
asset in relation to any business property if it was neither –
(a)
used wholly or mainly for the purposes of the business concerned
throughout the whole or the last two years of the relevant period …, nor
(b)
required at the time of the transfer for future use for those
purposes …”
10.
There has been no agreement or determination as to the value of the
shares in the event that full relief is not available. We are not concerned in
this appeal with questions of valuation.
Findings of Fact
11.
We must consider the nature of the business in December 2007, at the
time of the transfer of value. We were not told of any significant change in
the way the Business Centre has operated since 2007.
12.
The Appellant relied on oral evidence from Mr Alfred Buller, the son of
the Deceased and a director of the Company. HMRC relied on oral evidence from
Mrs Joanne Beard, together with a witness statement from Mr Colin Ryder which
was not disputed. In the light of all the evidence we make the following
findings of fact.
13.
The Company acquired the Business Centre in 1987. It obtained finance to
assist in the purchase from the Local Enterprise Development Unit. The
memorandum of association of the Company is drafted in wide terms and does not
assist in defining the nature of the Company’s business.
14.
The Business Centre provides office, industrial and warehouse space for
small to medium sized businesses. It was not purpose built, but was originally
used as factory premises, located on the outskirts of Belfast. It comprises
105,000 sq ft of units, the smallest unit being 100 sq ft. There is 20,000 sq
ft of office and showroom space. Units can be taken on a short or long term
basis but in fact there is very little turnover of occupiers. Mr Buller
described it as “a very settled community”. 15 units might be empty at
any one time The site includes car parking space available to occupiers, their
employees and customers. There is a reception area with a receptionist employed
by the Company. Occupiers have 24 hour access to the site and the Company
provides site security. Entrance to the site is via a manned security barrier.
15.
Approximately 15% of the Company’s income from the Business Centre comes
from office space let to a company called Burdens. Those offices are in a large
self-contained corner unit of the site. It is common ground that the offices
let to Burdens are in the nature of an investment.
16.
Apart from Burdens, approximately 10% of the Business Centre is offices.
The balance is two thirds warehousing used by retailers or wholesalers and one
third light industrial use. In total there are approximately 400 people in or
around the Business Centre on a typical working day.
17.
The Deceased spent a lot of his time at the Business Centre dealing with
the everyday matters that might arise with occupiers. On his death the Company
employed a full time replacement as a “site administrator”.
18.
Businesses occupying units at the Business Centre do so on standard form
licence agreements. The agreements recite the fact that licensees do not have
exclusive possession of a unit. Units are lockable and licensees have their own
keys, with the Company retaining a master key.
19.
Monthly licence fees are payable calculated on a weekly basis. An
apportioned service charge is also payable at monthly intervals. The services
in respect of which the service charge is payable are set out in the First Schedule
of the licence agreement as follows:
“THE FIRST
SCHEDULE
1. Grass Cutting
2. Pest Control
3. Cleaning of the
common areas
4. Site
Security 5pm – 9am Monday to Friday and 24 hr Security at Weekends &
holidays (to be determined by Bullick Developments Ltd)
5. Buildings
Insurance
6. Water
Charges
7. General
Plumbing/Electrical Repairs and Maintenance to items that have been installed
by the Licensor only
8. Provision
of Receptionist to answer telephone calls, sort incoming and outgoing mail and
take delivery of parcels, together with general reception duties for visitors
and guests
9. Site
Maintenance and Repairs
10. Provision
of 1 unallocated Car Parking Space per Unit/Office
11. Provision
of domestic hot water to toilets, soap and towels or hand dryer
12. For
Office Occupiers only – provision of heat between 1st October and 30th
April. Electrical Lighting
13. For
Office Occupiers only – provision of heat to common parts of the building
between 1st October and 30th April ”
20.
It was common ground that the services provided within the service
charge at items 1-7 and 9-13 of the First Schedule, including security, were
the types of services a landlord would commonly provide to occupiers. That left
the provision of a receptionist at item 8 as arguably comprising an additional
service which might be a non-investment activity.
21.
The Second Schedule of the licence agreement provides for further
services to be provided by the Company if required by the licensee at an
additional fee as follows:
“THE SECOND
SCHEDULE
1. Provision of
telephone services, calls and line rental
2. Provision of Forklift
Driver, if required
3. Provision of
Secretarial Services
4. Provision
of Photocopying and Postage facilities
5. Acquisition
of Stationery, if required
6. Provision
of Fax Facilities for both incoming and outgoing correspondence
7. Hire
of Boardroom
8. Additional
Car Parking for extra vehicles, if required
9. For
Industrial occupants – metered electrical supply, if required ”
22.
The Company invoiced occupiers on a monthly basis for the provision of
services itemised in the Second Schedule. Unfortunately we were not provided
with any examples of those invoices.
23.
The Company employs a site maintenance person and a forklift truck
driver at the Business Centre. Both are full time employees. The forklift truck
driver is assisted by his brother. In addition there is a full time
receptionist providing secretarial and other support services both to occupiers
and to the Company, and another person doing the same job part time. In total
there are 3 full time employees and 2 part time employees. There are also 3
security guards employed.
24.
In relation to Item 1 in the Second Schedule, the occupiers of industrial
units and most of the offices do not have their own telephone landline. The
receptionist operates a switchboard and each occupier has an extension number.
Calls are put through to the extension, or to the occupier’s mobile phone
number. Outgoing calls are re-charged to users
25.
The layout and physical limitations of the Business Centre mean that
many of the industrial units are accessible only by small vans. For example,
some internal units occupy the ground floor in circumstances where height
restrictions prevent larger lorries gaining access. Where such occupiers have
deliveries from larger lorries they utilise the forklift truck service provided
by the Company to move deliveries to the unit. This is the service referred to
in Item 2. Mr Buller estimated that there would be 18 large lorries a day
delivering to occupiers at the Business Centre, however it was not clear to
what extent those deliveries would require the forklift truck service.
26.
Mr Buller said in evidence that some units with restricted access would
be unlettable without the provision of a forklift truck service. The appellant
also relied on a large number of signed standard form “statements” from
occupiers of units to the effect that “Our business could not be sustained
without the forklift services”. The circumstances in which those statements
came to be signed are such that we place little weight on their content. We are
not satisfied that the occupiers fully appreciated the significance of what
they were being asked to sign.
27.
We do not accept that units would be unlettable without the provision of
a forklift truck service. A significant number of units are occupied by small
businesses which would have no need for large deliveries. For example the
occupier of one unit operated a dog grooming business and would have no need of
large deliveries.
28.
The cost of supplying services within Items 3-6 is re-charged to users
according to use. The amount of profit generated was not clear from the
evidence. The Business Centre also has a Boardroom suitable for business
meetings which can be hired by occupiers. This is referred to in Item 7.
Similarly car parking charges are made where an occupier requires more than the
one space per unit provided for in the licence agreement.
29.
In relation to Item 9, each unit has a separate electricity meter and
the Company bills each user according to use. The Company is responsible for
paying the electricity supplier for all electricity used at the Business
Centre. It does receive a rebate from the electricity supplier which is
effectively the Company’s profit on this service. We were not told the amount
of the rebate.
30.
The income of the Company generated from licensees in the year-ended 31
December 2007 may be summarised as follows:
|
|
£
|
|
|
|
|
Licence
Fees
|
447,068
|
|
Service
Charges
|
53,335
|
|
Sundry
|
4,517
|
|
Equipment
Hire
|
4,452
|
|
Heat
and Light
|
31,284
|
|
Telephone
|
45,568
|
|
Postage
|
20,056
|
|
Car
Parking
|
5,192
|
|
|
|
|
Total
|
611,472
|
31.
The service charges of £53,335 cover the services itemised in the First
Schedule. Surprisingly, Mr Buller was not clear in his evidence as to how the
income from the services itemised in the Second Schedule was accounted for in
the annual accounts. Nor was he otherwise able to identify the income derived
from the services itemised in the Second Schedule. It was clear to us however
that the items identified separately in the financial accounts correspond to
the items in the Second Schedule. In particular, and we find as a fact, that
the item described as “equipment hire” in the accounts was the income from
providing the forklift truck service.
32.
The Company therefore derived an income of approximately £4,500 from
providing the forklift truck service. Mr Buller said, and we accept, that often
the Company would not charge occupiers for use of the forklift truck as a gesture
of goodwill. The employee who drove the forklift truck would charge an occupier
who had booked the service in advance, but if an occupier wanted to use the
service on an ad hoc basis without booking it would often not be charged.
33.
The service of arranging deliveries for occupiers, including use of the forklift
truck service, is available at all times including when the occupier is not
present.
34.
The income from heat and light, telephone and postage was generally a
re-charge of expenditure incurred by the Company in providing those services.
The sundry income of £4,517 relates to hire of the Boardroom, secretarial
services and stationery. Most of this related to hire of the Boardroom.
Decision
35.
There are now a number of authorities in the context of land which
consider the question of whether a business consists wholly or mainly of
holding investments. The most important of those authorities is the decision of
the Court of Appeal in IRC v George (exors of Stedman decd) [2003] EWCA Civ 1763. The authorities, including a decision of the Court of Appeal in
Northern Ireland in McCall (personal representatives of McClean decd) v
Commissioners of HM Revenue & Customs [2009] NICA 12, were recently
reviewed by the Upper Tribunal in Commissioners of HM Revenue & Customs
v Lockyer (personal representatives of Pawson decd) [2013] UKUT 50 (TCC).
36.
There was no real issue between the parties as to the nature of the test
to be applied. We do not propose to repeat a similar review of the authorities,
but we derive the following principles to be applied in deciding whether or not
a business consists wholly or mainly of holding investments:
(1)
The various activities involved in operating a business relating to the
exploitation of land may be allocated between “investment” and “non-investment”
activities.
(2)
In the light of that allocation the question is whether the investment
element of the business is predominant (See George at [11]).
(3)
The ultimate issue concerns the relative importance of non-investment
activities to the business as a whole (See George at [51].
(4)
There is a wide spectrum involved in such businesses. At one end is the
granting of a tenancy together with activities sufficient to make it a
business. At the other end is the running of a hotel or shop on the land. The
holding of land as an investment may be the very business carried on or it may
be merely incidental to the business. It may also be one of a number of
principal components of a composite business (See George at [12] and
[16]).
(5)
It is necessary to look at the business in the round. The relative
income and profitability of the various activities is relevant but not
determinative (See George at [13]).
(6)
The exception in section 105(3) IHTA 1984 is not confined to purely
passive property investment (See George at [18].
(7)
Property “management” is part of the business of holding property as an
investment, including finding occupiers and maintaining the property as an
investment. However that term does not extend to additional services or
facilities provided to occupiers and it is irrelevant whether the provision of
such additional services is included in the lease. The characterisation of such
services depends on the nature and purpose of the activity and not on the terms
of the lease (See George at [27] and [28]).
(8)
The test to be applied is that of an intelligent businessman, concerned
with the use to which the asset was being put and the way in which it was being
turned to account (See McCall at [11]).
(9)
The test involves a question of fact and degree as to where a particular
business falls within the spectrum (See McCall at [18]).
37.
In the context of property management and additional services Carnwarth
LJ said in George as follows:
“[27] …In the case of a
building for letting, it is unlikely to be material. [The additional services]
will not be enough to prevent the business remaining “mainly” that of holding
the property as an investment.”
38.
In Lockyer, Henderson J considered the decision of the Court of
Appeal in George in detail and said this:
“[30] … The implication is
in my judgment clear. In any 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. ”
39.
Mr Hanna QC who appears for HMRC described this as a “working
presumption”. We prefer not to use the term “presumption”, and we note that
Henderson J did not use that terminology. Analysis in terms of a presumption is
likely to give rise to subsidiary questions, such as what is a “normal property
letting business” and what is the significance of any variation from such a
business on the facts of a particular case. That would deflect from the
ultimate issue we have to decide which both parties are agreed is a question of
fact and degree, to be decided on the basis of the evidence.
40.
In the present appeal it was common ground that the Company was carrying
on a business. However there was some divergence as to what was comprised in
that business. Mr Hanna submitted that the business of the Company was not a
composite business of the type referred to by Carnwarth LJ in George.
However it seems to us that the offices let to Burdens, which the appellant
accepts viewed on their own were an investment property, could arguably be
considered to be a separate component of the business. That part of the
business was wholly or mainly the holding of an investment. Alternatively it
may be that the Burdens offices did not form part of the business at all and
would fall to be treated as an excepted asset under section 112 IHTA 1984.
Whilst these distinctions were canvassed in closing submissions, the evidence
itself was not really directed towards such issues. In the event however we are
able to decide this appeal without reaching any concluded view on these issues.
41.
The submissions of Mr Orr QC for the appellant centred on the additional
services provided under the Second Schedule, and in particular the provision of
fork lift truck services. Such services, he submitted, should be viewed in the
context of the unusual physical nature of the Business Centre with restricted
access to many units. He argued that use of some units by occupiers would be
difficult or impossible in the absence of a forklift truck service. Essentially
the appellant’s case was that without the forklift truck service the land would
not generate much if any income.
42.
Mr Hanna submitted that forklift truck services fall within the category
of services that would normally be provided by a property investment business
rather than in the category of additional services. In making that submission
he drew an analogy with a lift in a residential block facilitating access to
apartments. We do not consider that is a good analogy. The lift is part of the
building itself, over which rights would no doubt be granted to occupiers. As
such it is properly viewed as part of the subject matter of the tenancy
together with access to all other common parts. There is no service involved in
the provision of a lift. The only service would be maintenance of the lift,
which would, we consider, be part of the maintenance of the investment. The
fact that provision of a lift or the maintenance of a lift could not be
described as a non-investment activity does not help us categorise the
provision of a forklift truck service.
43.
Mr Orr’s submission amounts to a “but for” test which we do not think is
supported by the authorities. Even if the basis for his submission was
established on the facts, we do not consider that it leads to a conclusion that
the forklift truck service predominates. The fact that some units could not be
let without the provision of a forklift truck service would tend to suggest that
the service is part of the investment activity. It is an element of sensible property
management, not generally but certainly in the context of this particular
property.
44.
In any event, and for the reasons given above, we are not satisfied on
the evidence that many of the units do rely on the forklift truck service.
Further we are not satisfied that any units would be unlettable without such a
service.
45.
We accept that it is necessary to look at the business in the round, and
in doing so the relative contribution to income or profits is relevant but not
determinative of the issue. On the facts of the present case we must consider
the nature and extent of the additional services and their contribution to the
business. The analysis involves both qualitative and quantative assessments.
46.
The non-investment services provided by the Company include the forklift
truck service and the provision of office type facilities. We do not consider
that those additional services predominate when considering the activities of the
Company as a whole. Even if we were to take out the Burdens side of the
business, the real nature of the business remains an investment business
exploiting the land by granting tenancies and licences. Most of the income from
additional services relates to re-charges for electricity, telephone and
postage. The income from the other additional services is very modest compared
to the licence fee income. Considering the facts by reference to the nature of
the activities and the income produced by those activities puts the Business
Centre well towards the investment end of the spectrum.
47.
We were told by Mr Orr that finance from the Local Enterprise
Development Unit when the Company purchased the Business Centre in 1987 was not
available for investment projects. To some extent Mr Orr relied on this fact as
supporting the appellant’s case. We were not taken to any statutory or
regulatory provisions in relation to such finance, but in any event we do not
consider that the position in 1987 under a different regulatory regime provides
any assistance in dealing with the issue under Section 105(3) IHTA 1984. We are
required to look at the position at the time of the transfer of value in 2007.
Conclusion
48.
For all the reasons given above we must dismiss this appeal. The business
of the Company was mainly holding investments and as such the shares in the
Company were not relevant business property.
49.
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.
JONATHAN
CANNAN
TRIBUNAL
JUDGE
RELEASE DATE: 13 January 2014
