A special commissioner decided that, on the facts and evidence, a development company's land constituted stock on the death of its major shareholder, notwithstanding the receipt of rent from certain properties, such that none of the land was appropriated as investments. Accordingly the company was not an investment company and a claim for business property relief could be made in relation to the value of his shares on the deceased's death.

Facts

At the date of his death on 24 October 1999, the deceased was the managing director and a major shareholder in a property company. An issue arose as to the status of the company. If the shares were shares in an investment company then IHTA 1984, s. 105(3) would deny business property relief in relation to the value of the shares on the relevant death. If the executors sustained the argument that the company was a property development company whose holdings of land ranked as stock, and if the substantial amounts of rental income received by the company did not undermine that claim, then the shares would have qualified for 100 per cent relief from inheritance tax (IHT).

The deceased's son, a director of the company, explained how the company's business had always been, and now remained, that of a development trade, marshalling sites for development with a view to the sale of finished developments. In short, the executors contended that the company was manifestly a land development company whose land was held as stock; that there had never been any appropriation of land as an investment; and that the facts in relation to all the land retained at the date of the relevant death sustained this analysis.

The Revenue contended that the vastly disproportionate amounts of rent received, contrasted with low or nil realisation profits meant that, on the balance of activities test propounded in Farmer & Anor (Exors of Frederick Farmer, dec'd) v IR Commrs (1999) Sp C 216 and in George & Anor (Exors of Stedman, dec'd) v IR Commrs [2004] BTC 8,003, the company's business has to be regarded as mainly one of making and holding investments. Further, looked at in the round, during the 1990s and probably earlier than that, the company had changed from being an active property development company to one which mainly let its stock of property on leases of varying lengths to generate income and as such fell within IHTA 1984, s. 105(3). It was specifically confirmed by the Revenue that the only ground on which it was suggested that the company was covered by the definition in s. 105(3) was as an investment company, and not as a land dealer.

Issue

Whether the shares in the taxpayer company were shares in a company ‘whose business consisted wholly or mainly in making or holding investments’.

Decision

The special commissioner (Howard M Nowlan) (allowing the appeal) said that it was perfectly possible for the taxpayer company to have retained unsold stock, and appropriated it as an investment, whilst still conducting the development trade. The evidence given on behalf of the executors had satisfied the tribunal that the company had never embarked on one of its few shopping centre developments with a view to making a profit on sold parts, and retaining the balance as an investment. There were two possible scenarios to be tested in relation to the critical appropriation question. One was the question of what the right analysis would be if a trader commenced a project by intending to sell everything, and then found that there were parts that simply could not be sold outright. Rather than him deliberately intending to retain them, he simply ‘gets landed with the residue’, and in this case let the residual units or the shopping centre at a rental because that was all that he could realistically do. The question then was whether he had reluctantly appropriated the residue as an investment, or whether a trader had just done what he was forced to do with a slow stock line, such that all his actions remained actions in the course of trade. That was one question. The proposition that the developer was landed with unsold units in a shopping centre development would become a little thin if it occurred repeatedly. There was however another possible factual explanation of the retentions of a certain element of part-completed developments in that there was always a development motivation for the retentions. Some areas were let at full rentals to preserve control over the site and facilitate phase three of a development. An anchor tenant had to be secured, and could only be secured on a rental basis, to render other units saleable on more advantageous terms. The question therefore, was why the taxpayer had retained a number of residues of developments that generated rents.

None of the various assertions as to why properties were retained generating rental income was particularly questioned or doubted by the Revenue because their case was advanced largely on the grounds that the preponderance of rents over realisation profits was itself decisive, or on the ground that the level of rents meant that the taxpayer's business must have changed from that of development to investment. The evidence was perfectly tenable and was not subjected to scrutiny. In the light of that, and also because the evidence was convincing as it seemed that this family had property development in the blood, the executors’ evidence would be accepted.

Therefore, reverting to the two possible rationales for retention of properties, with the resultant significant receipt of rents, the explanation lay far more in the sphere of various motives geared to protecting and eventually later realising future development potential, rather than the alternative explanation of the company simply being landed with various unsaleable interests such that various residues of developments had to be let. In the light of that, and because the first explanation was inconsistent with any contention that the properties were appropriated from stock to investment, the only conclusion was that the taxpayer company held none of its properties as investments. A company with stock, but not investments, could not be treated as conducting the business of acquiring and holding investments. Accordingly, the appeal would be allowed.

(2008) Sp C 687.
Decision released 9 June 2008.