Claim for Business Property Relief
17 July 2008
The recent case of The Executors of Mr D W C Piercy (Deceased) v Revenue & Customs Commissioners concerned a claim for Business Property Relief ("BPR") in respect of shares in a land development company. The issue considered in the case was whether the company's business consisted wholly or mainly of holding investments and thus BPR should not be available.
By way of background the company, Temple Lodge Limited, was a land development company which held a number of properties as trading stock. The company had a long history of property development consisting of locating and assembling development sites, arranging finance and taking forward development schemes.
It was accepted that all the properties were originally acquired by the company as trading stock with the intention of onward sale. Many of the properties had actually been realised outright in a trading sense (and corporation tax then had been charged on the basis that the company was and is a trader). The company had however in recent years retained a number of residues of development that generated significant rent.
HMRC contended that the level of rental income received against other profits meant that the company's business consisted of holding investments. The question was therefore whether any of the properties had been appropriated as investments.
The company put forward reasons why the properties had been retained with resultant rentals. They asserted that there was always a development motivation in respect of the retentions. Some areas were let at full rentals to reserve control over the site and facilitate the next phase of development. An anchor tenant had to be secured and could only be secured on a rental basis, to render other units on more advantageous terms.
Small industrial units were thrown up and let on 5 year terms in the hope that after decades (at least 20 years) the planning blight through rail proposals would end and at long last a very profitable residential development would become feasible. In other cases leases were granted at rentals with a view to a reasonably long tenancy to a good tenant being sold to a pension fund or insurance company.
In the light of these arguments the Court accepted on the evidence that the properties had not been withdrawn from "stock" and appropriated as "investment land". It was accepted that the developer was in some circumstances landed with unsold units in the development site but that there was always a development motivation for the retention.
The Court concluded that as the company did not hold its land as investments it could not be conducting the business of acquiring or holding investments and thus full BPR relief should be available.
This is an interesting case which demonstrates that a receipt of rental income may well not indicate that there has been appropriation and that a property is thus not held as an investment. It is particularly interesting that the rental income can accrue over a long period but as long as there is still sufficient intention to develop BPR can still be available.
This may be very relevant in the current climate where property sales are slow and a property development business may resort to renting properties. In such circumstances if BPR is to be available the business must retain the intention for onward sales and it would be advisable to have appropriate documentation to evidence this intention.