What is a Business

    June 2013

    The term business is not defined for capital gains tax or inheritance tax legislation, but we have two recent tribunal cases to help our understanding.

    By an interesting coincidence, two of the tribunal cases published last month dealt with the same point – the meaning of a business for tax purposes. In Elizabeth Moyne Ramsay v HMRC [2013] UKUT 0226 (TCC), the Upper Tribunal looked at whether the letting of residential accommodation was a business for the purposes of the capital gains tax relief in TCGA 1992 s 162 where a business is transferred to a company in exchange for shares. In Trustees of David Zetland Settlement v HMRC [2013] UKFTT 284 (TC) TC02690, the First-tier Tribunal considered whether the letting of a commercial property was a business for the purposes of business property relief in IHTA 1984 s 105(3).

    Some may argue that a business for capital gains tax purposes is not the same thing as a business for inheritance tax purposes, but there seem to be few grounds to make any serious distinction. Neither TCGA 1992 nor IHTA 1984 defines ‘business’ and the view of Judge Berner in the Upper Tribunal was that ‘business’ should take its unvarnished ordinary meaning.

    Ramsay: ‘business’ for CGT Purposes

    In Ramsay, the activity carried on by the taxpayer was the letting of five flats. Mrs Ramsay provided extensive services to the occupants, but HMRC considered the activities to be just the normal incidents of ownership of an investment property. The First-tier Tribunal shared that view and concluded that Mrs Ramsay merely had an investment and her activities did not amount to a business. However, the Upper Tribunal did not agree. It said there was no reason why activities ordinarily associated with management of an investment property should not be regarded as referable to a business. In the view of the Upper Tribunal, Mrs Ramsay’s activities represented a serious undertaking earnestly pursued; it was conducted on sound and recognised business principles and her activities were of a kind which are commonly made by those who seek to profit by them. Accordingly, it was a business for capital gains tax purposes.

    HMRC has for years been opposed to the idea that letting property can be a business for capital gains tax purposes, and I guess an appeal can be expected.

    Zetland: ‘business’ for IHT BPR Purposes

    In Zetland, the activity was the letting of an office building and the question was whether the trustees were carrying on a business for the purposes of inheritance tax business property relief. Section 105(3) provides that this relief applies unless the business ‘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 of holding investments’.

    The trustees provided an impressive list of services to the tenants, indeed rather more than had been undertaken by Mrs Ramsay. There were a number of full-time and part-time staff, including a general handyman, a property manager, an in house solicitor and two secretaries. There were internet services, cleaning services and 24 hour security, as well as a café, a gym and hair salon – although the latter were not operated by the trustees. HMRC again argued that the trustees’ activities were nothing more than the normal incidents of investing in property and concluded that the trustees activities were wholly or mainly the making or holding of investments.

    The First-tier Tribunal agreed with HMRC and concluded that business property relief was not available. Interestingly, they said that the services provided by the trustees were insufficient ‘to rebut the mainly investments argument’ which had been advanced by HMRC. It is not clear why the argument advanced by HMRC was to be preferred unless and until it was rebutted by the taxpayer and maybe we shall hear more of this approach in due course.

    In the meantime, some clarity is urgently required. It does nothing for the coherence of the tax code for the same term (indeed, the same concept) to have different meanings for capital gains tax and inheritance tax purposes.

    *This article was first published in Tax Journal on 21 June 2013.