Another day, another Tax Tribunal case (the “Zetland” case) found in favour of HMRC, disallowing Business Property Relief (BPR) on property based assets.

In brief, Inheritance Tax (“IHT”) is chargeable on a taxpayer’s estate at the point of death, subject to the nil-rate band (currently £325,000) and various other reliefs. Of these, one of the most important is BPR. Qualifying for BPR on death saves a tremendous 40% in Inheritance Tax on the value of the qualifying assets. If IHT planning has taken place, using trusts and lifetime gifts to mitigate the ultimate tax rate, achieving BPR at death will remove whatever charge would be left.

The rules as to what are qualifying assets for BPR are complex, and not for this blog, but as far as property letting is concerned, we have at one end of the spectrum hotels which qualify, and at the other end property held for investment / capital appreciation ( FRI Investment leases, buy-to-lets) which does not. One needs little mathematical ability to assess the impact of 40% IHT on the relatively “illiquid” and sometimes highly leveraged estates of the UK’s private property investors.

Property activities, though, frequently fall somewhere between the two extremes of hotel operations and pure investment. And as demonstrated by numerous tax cases, the tax consequence of not being at either extreme is not always clear cut.

So to the Zetland Case; this concerned an old industrial building, subdivided into fifty or so small units let on relatively short leases. HMRC assessed the taxpayers’ activities were those of property investment, and denied the claim for BPR. The tax involved was significant, so the taxpayers challenged the assessment.

The taxpayers argued that they provided many services to their tenants; a café, Wi-Fi, meeting rooms to name a few, and for this reason and certain other reasons they should qualify for BPR. They also contended that as a result of their “business” activities they had increased gross income from some £510k pa in 1997 to £2.3m in 2007, which could not have been achieved from a pure passive investment in land.

Notwithstanding this, the Tribunal found in favour of HMRC, on the basis that in the round, this was a business dealing mainly in land or making investments.

HMRC are now on a roll, having won this case and earlier this year, another BPR case concerning bed & breakfast activities (“Pawson”). Neither case was clear cut and both involved an element of “service” provision, but the taxpayers in each case were unsuccessful. With each case, however comes a little more clarity and there must surely come, at some point, a tipping point whereby the level and nature of service provision is found to constitute a qualifying business, and the property from which the business operates will qualify for BPR.

It is impossible to predict where that tipping point will be, but when it’s reached and the Tribunal decides in favour of the taxpayer, that decision could force a wholesale change to the way in which the accommodation needs of small businesses are satisfied. One thing’s for certain though: there are several people watching this space.