Revenue's loss could be farmers' gain | 08 July 09

FARMERS with additional businesses such as holiday cottages and camp sites could be in line to benefit from a recent defeat in the courts for the taxman, according to leading law firm Ward Hadaway.

The outcome of the case, which involved an estate in Scotland, may allow owners of such ‘mixed’ businesses to pass on more of their assets to the next generation free of Inheritance Tax (IHT).

Andrew Facer, partner and head of wills and trusts at Ward Hadaway, explained: “HM Revenue & Customs have been increasingly seeking to deny IHT business reliefs where there is a mixed investment and trading business.

“Typically this is where there is a farming business that has diversified into areas such as holiday lets, caravans and camping, telecom masts or simply residential property letting.

“The Revenue have taken a number of test cases seeking to deny relief on the whole of the business on the basis it is mainly an investment business. The Revenue have largely lost these cases and have not made a high profile challenge for several years.

"However, they have now decisively lost in the Scottish case of the Earl of Balfour and, as a result, could find themselves on very shaky ground when it comes to ending IHT reliefs on similar businesses.”

The Earl of Balfour’s Whittingehame estate consisted of a mixture of in-hand farmland extending to almost 400 hectares, let farms extending to 371 hectares together with 26 let houses and two sets of business premises.

The judge in the case looked at the different business activities, taking into account a number of factors including turnover, profit, expenditure and time spent by partners and employees.

Despite there being an almost equal amount of let as in-hand land and most of the 26 let cottages not being occupied for the purposes of the trading business, the judge found the farm activities occupied by far the greater area of the estate.

Business Property Relief therefore applied to the whole of the business meaning that all the business (including all let cottages) passed free of IHT.

Andrew Facer said: “It is possible that the Revenue will appeal this judgement and it is only a judgment at the equivalent level of Special Commissioners in England and Wales.

“However it does again exemplify that where a business is a mixture of trading and investment, even a substantial investment element will not prejudice the trading status of the business for business property relief purposes.

“As a result, farmers may have significant opportunities to structure mixed businesses to pass not only trading but also integral invested assets to the next generation free of IHT.”

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