How services in many diversifications can improve IHT position

Diversified farms risk losing out on business property relief (BPR) from inheritance tax (IHT) if HMRC considers them to be wholly or mainly investment businesses.

This happens most frequently where income is derived largely from rents or licences.

However, in two significant tax cases relief was allowed because there was evidence that a certain level of service was provided to customers.

See also: Tax and money management tips for diversified farm businesses

The Vigne case, as it is known, concerned a livery business, and the Graham case holiday accommodation.

Hampshire accountant Julie Butler of Butler & Co says the principles in these cases can be applied to many other diversification activities.

In the Graham case, the provision of a sauna, a pool, bikes and personal care by the host tipped the balance for the tax authorities.

Relief was allowed in the Vigne case because the livery went beyond DIY and included additional services such as worming products and feed, mucking out and daily health checks for the horses.

“HMRC accepts that there is a spectrum: at one end is purely holding investments, at the other end of the spectrum is a full-blown trading operation,” says Mrs Butler.

“The Upper Tribunal (a tax court) said in Vigne that there is no bright light that divides these but in Vigne they thought the services provided pushed them far enough along the spectrum to succeed in their claim for relief.”

The fact that the enterprises required an employee to be present to provide the services was given some weight in both cases.

Evidence of services provided

Following the Graham case, Mrs Butler suggests providing quality services for guests and documenting those services.

“Ideally, a portfolio of evidence should be built up prior to any tax relief claim being submitted,” she advises.

Those running many other types of farm diversification could put their estates in a more favourable IHT position by providing services, she says.

In the case of caravan storage, for example, the receipt of a straightforward storage charge by the week, month or year would risk the enterprise being classed as an investment rather than a trading business for IHT purposes.

However, says Mrs Butler, where there are genuine services to the caravans for the owners if needed, they should be evidenced and might include:

• Cleaning inside and out before and after trips
• Parking vans
• Safety checks and maintenance before journeys
• Delivery to the site if needed
• General caravan repairs
• Hospitality could tip the balance – for example, refreshments when customers collect and return their vans
• A hamper of basic necessities for journeys

Camping enterprises might offer facilities such as mobile local food services – for example, fish and chip, pizza or kebab vans – or farm shop/café related services.

“Farm shop food boxes for the campers, or woodland bushcraft lessons, camp-and-ride offers with stables for the campers’ own horses could fit the bill. Alternatively, riding lessons and/or trekking on the farm’s own horses,” suggests Mrs Butler.

Links with walking clubs, history tours and farm tours could all add weight to the argument for relief, but there must be evidence that these services are provided, she stresses.

Those offering short-term commercial lets could consider providing a serviced reception or other administration facilities, and food facilities for staff of commercial tenants through a farm café or farm shop.

In a more recent IHT relief case, Firth, which concerned a claim for an aparthotel business, the inability to prove that the services that were claimed to be carried out were actually being carried out was the negative that lost the case, says Mrs Butler.

Employee timesheets, together with employment contracts, can help evidence the actual work done. 

Farm storage units could provide similar facilities to the caravans example, but these need work in order to develop them, says Mrs Butler.