A victory for the inheritance tax payer

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19 November 2010

At the end of August we heard that HMRC had failed in their appeal in the Balfour case.  The case concerned whether inheritance tax business property relief (BPR) was available on a Scottish agricultural estate which comprised of a mixture of in-hand farms and let land, cottages and buildings. 

The IHT legislation provides that BPR is not available on a business which wholly or mainly holds investments (such as let-land and cottages) rather than trading assets.  In the case of an estate with a mix of in-hand and investment activities an assessment is required of which type of activity predominates.

Lord Balfour held an interest in the Whittingehame Estate under the Will of his great-uncle, Arthur Balfour, the Prime Minister and World War I statesman.  The estate comprised of 1,907 acres with three let farms, two in-hand farms, twenty six let houses and cottages and two business premises.  There were also policy parks, woods and sporting rights and a farmhouse.

The case, and the subsequent appeal, focussed on two main issues.  The first issue was a technical one relating to whether in the two years prior to death Lord Balfour had run a single business or whether for most of that time the Will trustees had a lettings business which was separate from Lord Balfour's in-hand farming activities.  Here the judges have approved a widening of the concept of a single business for IHT purposes. The second issue was whether Lord Balfour's business was mainly involved in investment or trading activities. 

HMRC will have been hopeful of winning the appeal, not least because the first instance judge had made a mistake in his judgement when he included the let farms as part of Lord Balfour's in-hand trade. 

Previous case law has established various factors which guide the assessment of whether a business is predominantly engaged in trading or investment; they closely follow those set out in the previous high profile case Re Farmer in 1999. The appeal judges' conclusions can be summarised as follows:

The "various factors"InvestmentTrade
Net ProfitX
Time spentX
Capital value

Overall contextX


Although it was found that the capital value of the investment assets exceeded the value of the trading assets by nearly 2 to 1, the appeal judges did not think this was decisive and they accepted the view put forward by the executors that capital value should carry little weight given the estate's long term policy of holding land which would not be affected by relatively short term fluctuations in market value.


Having considered these factors the appeal judges concluded that the decision of the first instance judge was correct and that the BPR claim should be allowed.

The fact that the significant capital value of the investment assets did not tip the "investment business balance" will be of comfort to land owners with similar situations. But the decision will also be welcomed for its clear summary of the law which will help those wishing to make business planning decisions to maximise the availability of inheritance tax relief. 

For further information, please contact Tom Hewitt on +44(0) 117 902 2717 or on tom.hewitt@burges-salmon.com 

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