SVM27580 - Share Valuation Manual: Business Property Relief and Agricultural Property Relief

Meaning of "investment"

General

No hard and fast definition of ‘investment’ has been made by the courts.

Taxpayers may seek to infer that the wording "holding investments" connotes passive ownership and argue that extensive personal involvement by the deceased/transferor in the business cannot be classed as "holding investments".

The Revenue contested this view in the case of Moore deceased (see below) and our argument that a business of holding investments can exist whether the landlord was actively involved or essentially passive was upheld by the Special Commissioners.

To what extent businesses are ‘mainly holding investments’ for the purposes of s.105(3) depends very much on the substance of the business itself and the services which are provided, for separate consideration, over and above the mere right for others to use the property in return for rent.

The interpretation and application of s.105(3) has been tested before the Special Commissioners in the estates of Violet Moore (commercial premises) and Bertha Burkinyoung (furnished lettings). Those cases were related to unincorporated businesses but the decisions on whether a business consisted wholly or mainly of making or holding investments are regarded as being equally applicable to the activities of companies.

These decisions of the Special Commissioners are considered to have equal application in other lettings cases.

Lettings of commercial premises

These may tend to be the most clear cut type of ‘investment’ cases as written tenancy agreements - detailing both the landlord’s and the tenant’s obligations - may exist and there may be little other activity on the part of the landlord.

Martin & Horsfall (Executors of Violet Moore deceased)-v- CIR (1995) SC2

At her death in 1991, Mrs Moore owned a site on which several industrial units were erected. Since the 1960s she and her husband (who died in 1989) had let the units on three-year leases to various businesses. The activities carried out by Mr and Mrs Moore (she continued after his death) were listed as:

• exterior repair and maintenance (including repairing walls, unblocking drains and gutters)
• exterior decoration
• maintenance of common areas (sweeping up litter, trimming hedges, resurfacing tarmac, maintaining toilet areas)
• maintaining the heating system for the site
• policing common areas (sorting out parking and rubbish problems)
• advertising for and interviewing prospective tenants
• negotiating renewal of leases
• dealing with tenants’ complaints.

Mr and Mrs Moore were extensively and personally involved in these activities often undertaking painting, removing rubbish and maintaining the heating themselves and frequently visiting the site.

The Revenue:

1. did not accept that the level of activity was sufficient to establish that there was a business for the purposes of s.105(1)(a)

and

2. argued in the alternative that, if there was a business, it consisted wholly or mainly of making or holding investments within the meaning of s.105(3).

The Revenue conceded (a) before the hearing. So (b) was the sole issue for the Special Commissioners.

The Special Commissioner held that the operations carried on by Mrs Moore were the owning of freehold premises; those operations were conducted by:

• seeking and choosing tenants
• granting and renewing leases
• complying with the specific landlord’s covenants
• managing the premises.

The gain obtained was the "net rents and nothing else".

The Special Commissioner decided that a business in fact existed; he said Mrs Moore

"... conducted a continuing activity on what seems to have been sound business principles and in a manner characteristic of commercial landlords of like properties. Those features, I think, elevate her activities from mere ownership or mere investment into a business ..."

However, he did not accept the executors’ argument that the extensive personal active involvement by Mrs Moore made the business more than just holding investments:

"There is no necessary implication in the words of s.105(3) that the expression "business of holding investments" is to be confined to the passive investment of property such as long leases managed by managing agents. To imply that is to narrow the scope of the words of exclusion to a point that is not in line with their ordinary meaning. It leads to the result that activities which could reasonably be described as incidents of investment holding, such as the active, efficient and energetic management of the reversion, have to be left out of the investment holding side of the equation in determining whether the business can properly be described as wholly or mainly of making or holding investments. In line with the principle that the words of a relieving provision should not be given a generous construction, it follows that words of exclusion found, as here, in the relieving provision should not be given an unnaturally restricted meaning."

In applying the principle in Fry -v- Salisbury House Estate Ltd 15 TC 266, that a distinction can be drawn between the activities of a landlord which he assumed under the lease and those which are separate from the land-owning part of the business, he stated:

"The activities which a landlord carries out because he is obliged to under the lease are incidents of the tenancy and so fall on the "holding investments" side of the equation. The business activities, if any, carried out by the landlord for gain and which are not required by the lease fall on the other side of the equation. The activities carried on by the landlord which are not required under the lease and for which he receives no separate consideration will fall on the "holding investments" side of the equation if they are connected with and incidental to the holding of the property as an investment."

In applying this to Mrs Moore’s business he found that:

"...active though [her] business was, none of the activities.....were concerned with anything other than the making or holding of investments.....they were all part and parcel of the business of making or holding investments."

and dismissed the executors’ appeal accordingly.

It can be successfully argued therefore that many of the activities carried out purporting to be services are no more than the normal obligations of a landlord, particularly if the activities are prescribed obligations under a tenancy agreement.

Furnished lettings

Regard also needs to be had in these cases to the level of services provided by the landlord and which exceed the responsibilities as landlord.

Burkinyoung (Executor of Burkinyoung deceased) -v- CIR (1995) SC3

Mrs Burkinyoung owned a house in West London which, at her death in 1989, was split into four self-contained flats let furnished on assured shorthold tenancies. She employed managing agents who carried out the following activities:

• organising internal and external repairs and maintaining and refurbishing the property
• maintaining inventories of the furnishings
• arranging the cleaning of the common areas and the maintenance of the garden
• legal and general administration of the lettings and rent collection
• advertising vacancies and negotiating and arranging tenancy agreements
• responsibility for the insurance of the property, the payment of the rates and water rates and the provision of electricity to the common parts of the building

and

• dealing with the tenants’ complaints.

The Revenue conceded that Mrs Burkinyoung's owning and letting activity consisted of a business and therefore ranked as relevant business property for the purposes of s.105(1)(a) unless excluded by the words of s.105(3). However, the Revenue maintained that Mrs Burkinyoung's business consisted wholly or mainly of "making or holding investments" and the NOD was issued on this basis. The Special Commissioners upheld the Revenue’s view, on the same reasoning as the Moore case.

Whilst both sides accepted that Mrs Burkinyoung's owning and letting activity consisted of a business the Special Commissioner thought that it was necessary to determine what the business was. He stated:

The Special Commissioner found that the whole gain derived by Mrs Burkinyoung came to her as rent. She provided no additional services and so earned nothing from any other sources or activities associated with the house. The appeal was dismissed.

It will be clear from both of these cases that s.105(3) can be applied without too much regard to the extent of personal involvement by the deceased/transferor. However, where services, outside those required of a landlord, are supplied for a separate consideration, they need to be taken into account when deciding whether the "mainly" qualification in s.105(3) is met. In most cases the level of services provided will not be sufficient to weigh the balance away from "investment".