Inheritance tax business property relief has attracted attention with the Chancellor’s announcement that the relief would potentially be restricted in respect of deaths after 5 April 2026.
Inheritance Tax Act 1984 gives relief from IHT on “relevant business property”. Relevant business property is stated as including “property consisting of a business or interest in a business”.
The legislation states; “A business or interest in a business, …, [is] not relevant business property if the business … consists wholly or mainly of … making or holding investments.”
Mrs Pearce owned a fishery at Fulling Mill on the River Itchen described as “one of the ‘classic’ chalk rivers of southern England”. The Itchen supports a variety of fish including brown trout, grayling and the occasional salmon.
Following her death, her executors claimed IHT business relief on part of her residence including an office from which she managed the business, a reception room, and a rod room where customers could store fishing equipment and kit. Additionally, relief was claimed on the value of an outbuilding and garage where mowers, strimmers and hand tools used for maintaining the land around the river were kept.
IHT business relief was also claimed on the river and the streams which fed it and the banks of the river and streams.
Mrs Pearce worked full time running the wild fishery, even though it was increasingly unprofitable. The riverbank had to be kept clear of vegetation so the fishermen had access to the river. Trees and other plants along the riverbank had to be managed to provide the right amount of shade and the right conditions to encourage the flies on which the fish fed. The river itself had to be kept clear and the banks protected from erosion.
It was common ground that Mrs Pearce was carrying on a business. The issue for determination by the Tax Tribunal was whether the business, at the date of Mrs Pearce’s death, consisted wholly or mainly of holding investments.
HMRC’s position was that the deceased’s business was the exploitation of land to produce income – which is an investment activity. The land was exploited by the granting of licences to people who wanted to fish in the river. The only income was from ‘rod fees’ – there were no sales of equipment or fees for tuition. HMRC accepted that Mrs Pearce took active steps in running the business and carried out a great deal of maintenance.
The Executors contended that the deceased’s wild fishery business could not be regarded as a property letting business. The income was derived, not from the exploitation of land but from the running of a fishery business. Looked at in the round, the deceased’s business was not one of the holding of investments but the provision of services and incidental facilities so as to take it out of the investment category.
The Tribunal adopted the following approach;
(1) The starting point is that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity.
(2) It is the nature of the activities, not the level of activity, which matters. Very active management of an investment does not prevent the business being an investment business.
(3) There is a spectrum of businesses involving the exploitation of land in order to generate income. At one end are property letting businesses which are clearly investments. At the other end are hotels, shops and farms which are clearly not investment businesses.
(4) Where on that spectrum a business falls can be determined by looking at the investment and non-investment activities as a whole, standing back, and looking at the business in the round.
(5) Where there are investment and non-investment activities, consider whether, looking at the business in the round, the non-investment activities are of sufficient importance that the business is not mainly an investment business.
The Tribunal concluded;
“Having considered matters in the round we have concluded that the business carried on by Mrs Pearce at the time of her death was mainly a business of holding investments. Although there were non-investment elements, they are not sufficient to outweigh the investment elements. Accordingly, the business is not eligible for Inheritance Tax Business Relief.”
