Malcolm Gunn CTA (Fellow) TEP takes us through the inheritance tax implications of ‘mixed use’ land and buildings for business property relief purposes, in respect of different types of taxpayers.
Land and buildings have their own provisions within the rules for inheritance tax (IHT) business property relief (BPR) which can mean that more relief is available for them than you might expect. Equally, it is possible to structure things badly and lose a lot of relief.
Sole trader
For a sole trader, the first point to note is that any land or building might be used for different business purposes at the same time. The most common example of this would be shop premises where a trade is carried on at the ground floor and the upper floor might be let to a tenant. In such a case, the ground floor trade will constitute a business of its own, and the letting of the upper floor will be a separate activity.
With the sole trader’s shop, so long as the premises are used mainly for a trade, or other qualifying activity, the whole gets BPR, including any part which is let.
Limited company
The position can be different if all these activities are carried on by a company. In that case, one has to identify what the main activity of the company is, and if it is found to be an investment activity, then shares in the company will not qualify for any BPR.
Business premises
One might expect that it follows from this that if most of a sole trader’s premises are not used for trade purposes then there is no relief at all. In fact, however, this is not the case as the rules allow for the taxpayer to isolate the part used for each activity, and to apply the relief to the part used for the trade.
A key point is that there must be exclusive use for this activity. So normally this rule will not generally allow relief for an office at home where one does not usually advise use on an exclusive basis for capital gains tax reasons. But with the sole trader’s shop, if there are two floors of letting and ground floor use for trade, then the trade proportion will qualify for BPR.
Furthermore, if the letting on one of the floors above is brought to an end, and that floor is then used for storage of trade goods, the whole property may immediately thereafter qualify for BPR, so long as it is a single asset. The floor does not need to be used for business purposes for two years, so long as it can be shown that there is a requirement to use the floor in the business for the future.
Wind or solar farms in a commercially managed woodland or agricultural estate
Another example of how this rule applies is where a wind or solar farm is to be constructed in commercially managed woodland or in an agricultural estate. The wind or solar farm would not in itself qualify for BPR if it is operated by a third party business which is allowed onto the land to construct it because it is an investment asset for the landowner. But so long as the woodlands or agriculture are on most of the land, the whole area gets relief including the wind or solar farm.
Strictly this rule should be applied to each holding of land which represents a single asset. An estate will often comprise several separate assets which may be sold independently, for example plots with separate Land Registry title numbers and access rights. It may, of course, be difficult to form a conclusion on what constitutes land as a separate asset for the purposes of these rules, but if it was acquired under one contract as a whole unit and realistically can only be sold in that way, it should be accepted by HMRC as being a single asset notwithstanding that there are separate title numbers within it. So an estate which is mostly used for trade activities such as farming can then have full relief, even if it includes various cottages which are let on shorthold tenancies.
Partnership or family company
Where one can go wrong with BPR is with properties used by a partnership or family company. If these are held separately by a partner or director then there is only 50 per cent BPR on them. A partner can easily introduce the property into the partnership as part of its capital to get full relief, retaining most of the rights to it under the partnership agreement. However, if the property is used by a company, transferring it to the company incurs a charge to stamp duty land tax on its market value.
Practical Tip :
To maximise BPR, make sure most of the trade premises are used in the business and then the whole gets relief, including any investment element.
