Horse-sense reigns in Vigne- “DIY livery-plus” not denied IHT business relief

Mon 02 Oct 2017

The personal representatives of the estate of Maureen W. Vigne (deceased) have successfully appealed against HMRC’s refusal of inheritance tax business property relief (BPR) The case turned on whether MRs Vigne had run a business that required land or was mainly holding the land as an investment and the trading activities carried out on the land were less significant than the management of the land as an investment.
HMRC accepted that the livery business was a business for IHT BPR purposes but contended that as it was based on the exploitation of land, the business it should be regarded as wholly or mainly one of “dealing in . . . land or buildings”, and as such disqualified from the relief by Inheritance Tax Act 1984 (IHTA) s 105 (3).

What is “DIY-livery plus”

Livery is a catch-all term for the provision of accommodation for horses which can broadly speaking be divided into four levels of provision:
1. grass livery, where a horse is kept in a field but is not provided with a stable;
2. DIY livery, where a stable is provided in addition to occupation of a field but the horse’s owner is wholly responsible for day-to-day care;
3. part livery, where the livery operator and the horse owner share day-to-day care for the horse; and
4. full livery, where the livery operator provides day-to-day care of the horse and all its associated needs.
As with any other property-based business, HMRC take a keen interest in the level of other services provided to customers, looking to distinguish between services and works that would be a normal incident of a property provision business and those which represent added value, so that the business activity does not predominantly consist of the provision of property, which is exploitation of an investment asset.
The case therefore falls to be considered on similar principles to:
George (caravan park where additional services to static caravan tenants were not sufficient to justify BPR);
McCall (land under “conacre”, a form of Northern Irish grazing tenure, was not agricultural property);
Pawson- estate of Lockyer (furnished letting of a single holiday cottage was not business property)
which all concerned forms of property letting which were judged to be wholly or mainly dealing in land.
Judges Geraint Jones QC said that of the four broad levels of livery provision mentioned above neither 1, grass livery nor 2, DIY livery would involve sufficient service level to obtain BPR but 3, part livery and 4, full livery would.
The problem with Mrs. Vigne’s business was that what was provided was more than DIY but less than part livery. Therefore the Judges analysed the criteria and set against them the services that Mrs. Vigne had provided, considering the extent to which they were part of the normal course of managing land as an investment property or arose as incidents of the non-investment business.
HMRC argued that activities should be compartmentalised on the binary basis that they either related to the management of property as an investment, i.e. those expenses that would have been borne by the landowner if there was not a business as well, or those that should be regarded as referable to the business. The Judges rejected this proposition as artificial and inappropriate because it did not fit in with the way the test is expressed in IHTA. What the Judges said is required is a “fact and degree” approach to the activity as a whole. This emphasis on activity is important, recognising that it would also be too simplistic to look at the return on investment from the activity: the livery business did not generate significant additional returns and in some years the investment required meant that profits were less than could have been obtained by simply renting the land out.
Factors that the Judges considered swung the balance in favour of the business falling into part livery and qualifying for BPR included in particular:
• engagement of an employee to work in the livery business;
• a planning application to construct living accommodation for that employee (which albeit unsuccessful, indicated the expansion of the business and the perceived need for the yard manager to be on site);
• services additional to DIY, such as worming and health inspections of the horses and hygiene matters including removing manure from the fields to avoid transmittal of infections between horses, all of these services regarded as necessary to provide owners with the assurance that their horses were positively looked after and protected from the risks of infection etc. that would come from a DIY livery arrangement and remove from those owners the obligation to do so for themselves;
• the management of the business, including its accounting were regarded as bearing the hallmarks of a business
• the provision of water and electricity which would not have been necessary had the business purely been one of merely holding land as an investment on which no business/ trading activity was taking place.

Take the business as a whole

The Judges concluded that there was no doubt that there was a business but the crucial test was whether that business as a whole, was excluded from BPR by the “wholly or mainly” test. The starting point for the test is that a business qualifies for BPR unless it is mainly one of holding investments. So to deny BPR requires a positive judgment that the activity is mainly one of holding investments. The Judges said that the test “does not require a consideration of whether any identified services or business activity contribute more to the income generated and/or profitability than the ability of a third party to occupy any part of the land” and they were satisfied on the facts that in reality the services provided were more than DIY livery and fell short of part livery but nonetheless sufficient valuable services were provided to horse owners to prevent the business being one of mainly dealing in property.

Agricultural property relief

The appellants had also contended that the property qualified as agricultural property on the basis that it included some fields used for growing hay for horse feed. The Judges decided that this limited use of part of the land would not have been enough for it to qualify as agricultural property and rejected the PRs’ appeal against refusal of agricultural property relief. The mechanics of IHT reliefs are such that where APR and BPR are both possibilities, APR must be considered first and BPR is only taken into account if, or to the extent that, APR does not apply.