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 over and above the mere right for others to use the
property in return for rent.
The interpretation and application of s.105(3) have been
tested before the Special Commissioners in the estates of Violet
Moore (commercial premises) and Bertha Burkinyoung (furnished
lettings). Those cases concerned 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 also
considered to have equal application in other lettings cases.
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:
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:
and
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:
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 outpurporting to be services are no more than the normal
obligations of a landlord,particularly if the activities are prescribed obligations
under a tenancyagreement.
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:
and
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:
"Both sides adopted the approach of Ralph Gibson J (as he then was) in Commissioners of Customs and Excise v Lord Fisher [1981] STC 238. That was a VAT case. The question was whether a business existed where some pheasant shooting enthusiasts had contributed to a fund to cover the cost of facilities provided for their mutual benefit and private enjoyment: in the circumstances it was held that the "syndicate" was not carrying on a business. However, Mrs Burkinyoung's activities satisfied five tests relevant to the present question which had been identified by the judge, on page 245, in that case. Mrs Burkinyoung's letting operations in relation to the property amounted to "a serious undertaking earnestly pursued". They amounted to "an occupation or function pursued with reasonable or recognisable continuity". They had a "measure of substance measured quarterly or annually". The letting had been "conducted in a regular manner on sound and recognised business principles". The activities were "of a kind commonly carried on by those who seek profit by them". On that basis I think that Mrs Burkinyoung's activities can be described as a business of owning residential property and granting furnished lets of the four flats contained in that property using the services of a managing agent".
"In the Martin appeal (1995) SC2, another "let property" case, I based my decision on the distinction between activities of a property letting business which were carried out qua landlord of the investment property and activities that were independent of that relationship. Activities of the former class included those involved in complying with the landlord's covenants under the lease or leases of the investment property; these included activities such as repairs and improvements which were generally designed to protect and preserve the landlord's reversionary interest".
"Those activities would be activities of "holding investments" in determining whether the business was one that consisted wholly or mainly of the making or holding of investments; that would be the case however onerous the landlord’s obligations might be and however much the landlord had been involved in the control or management of the property letting business."
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 toomuch regard to the extent of personal involvement by the
deceased/transferor.However, where services, outside those required of a
landlord, are supplied theyneed to be taken into account when deciding whether the
"mainly" qualificationin s.105(3) is met. In most cases the level of services
provided will not besufficient to weigh the balance away from
"investment".
| Additional Guidance: SVM150000 |
