In The Trustees of David Zetland Settlement ( UKFTT 284 (TC), published on 17 May 2013), the First-tier Tribunal has denied the taxpayer’s claim for inheritance tax ‘business property relief’ (BPR).
This is a significant decision because it is the first BPR decision in relation to a ‘serviced office’; and it raises the bar ever higher in relation to claims for BPR for businesses involving the use of land.
A business which is mainly one of ‘holding investments’, cannot qualify for BPR. Over the years, the courts and tribunals have held that businesses which derive their income from the ownership of land are to be considered ‘investment’ in this context. Thus, previous decisions have denied BPR to:
- Property investment companies;
- Industrial parks;
- ‘Grass keep’ lettings; and
- Most recently – in the case of Pawson – furnished holiday lets.
On the other hand, businesses which have exploited land, but in the context of the provision of additional ‘services’, have qualified for BPR, for example:
- It is generally accepted that a hotel or B&B would qualify for BPR;
- In a series of cases involving caravan site businesses in the 1990s, many qualified for relief;
- Most recently, in the Upper Tribunal decision in Brander ( UKUT 300) a large landed estate qualified.
The Zetland case involved a claim for BPR by trustees in relation to a ten yearly charge. The trustees held a number of business interests – all of which were considered by the FTT – but the majority of the decision concerns the trustees’ ownership of Zetland House. The key facts about Zetland House were as follows:
- It comprises a commercial building divided into units which are let to approximately 50 tenants for different periods of time normally ranging between 1 and 5 years.
- It had originally been a multi-story factory occupied by a few firms of printers, but by 1997 one quarter of the building was empty. The gross rent was then approximately £510,000.
- The business model was then changed to offer flexible office space for computer, media and high technology businesses. Office space was made more available, but the offices were made smaller and in reorganising the building approximately 15,000 sq ft of letting area was lost. Nevertheless the gross rent and service charges in the year 5 April 2007 had increased to slightly under £2.4m.
- In addition to the use of the office space the tenants have access to 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 a coffee shop and gallery area in the basement.
It might be hoped then that the business was close in nature to that of a hotel – i.e. high volume, short terms lets, lots of services available to the occupiers. Nevertheless the FTT refused the BPR claim.
There is not the space here for a full analysis of the FTT’s decision; however, these extracts illustrate the tribunal’s thinking:
The services provided were mainly of a standard nature aimed at maximising income through the use of short term tenancies.
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.
This decision, following quickly after the Upper Tribunal’s decision in Pawson, confirms that for any business involved in the ‘letting’ of land, the ‘bar’ when claiming BPR appears now to be set very high and businesses in this category should sensibly review their current status.