‘Do the Balfour’

  • Author : Hayden Bailey
  • Date : January 2011
ABOUT THE AUTHOR: Hayden Bailey TEP is a Partner at Boodle Hatfield

T he Upper Tribunal’s Judgment in favour of the taxpayer in HMRC v Executors of the late Fourth Earl of Balfour [2010] UK UT 300 has potentially muddied the (trading) waters for business owners and their advisors. Common advice now seems to be that taxpayers with large estates or with a mixture of business activities should arrange their affairs to ‘do a Balfour’ and show all of their assets as being used in a single composite business with both trading and investment elements, but predominantly trading so as to secure 100 per cent inheritance tax (IHT) relief on the whole.

We are now familiar with Special Commissioner Dr Brice’s reasoning in Farmer’s Executors v IRC [1999] STC (SCD) 321 that the word ‘mainly’ must be read in its statutory context to mean ‘more than half’ and, in reaching a conclusion as to whether a business is or is not wholly or mainly one of holding investments, we must look at ‘all the relevant factors of what a business consists’. Then, taking the whole business in the round and without giving predominance to any one factor, if the conclusion is that the business consists mainly of trading and not investment activity, 100 per cent business property relief (BPR) from IHT on death or a lifetime transfer is potentially available.

The case can certainly not be ignored, but not everyone seeking to ‘do a Balfour’ will necessarily find they can arrange their business activity so that the conclusion above can be reached. The weight given to each of the criteria used to determine the nature of a business has already been commentated on at some length. Below are some other issues that practitioners may take into account.

Legislative change

The Office of Tax Simplification (OFS) is currently reviewing a large number of tax reliefs. If BPR is re-examined it is perhaps not unforeseeable that there be some ‘alignment’ with capital gains tax (CGT), along the lines of a chargeable business assets/chargeable assets fraction used in relation to hold-over relief claims and the s.165(A) Taxation of Chargeable Gains 1992 definition of ‘carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities’, with substantially in that context taken to mean no more than 20 per cent.

One difficulty in ‘doing a Balfour’ is that we are not necessarily ‘banking’ any relief but in some cases looking to create structures to secure relief at a later date. These will require constant review to ensure the scales are not tipping the wrong way at the time of the tax event. It will be important to advise clients of the exit strategy if structures need to be unwound and the tax consequences of doing so.

A single business

The Courts appear to be moving more and more toward an ‘in the round’ approach to BPR and agricultural property relief (APR). Cases such as McCall and Keenan (PRs of McClean dec’d) v RCC [2008] STC (SCD) 782 affirmed [2009] STC 990 and Atkinson & Anor v HMRC [2010] UKFTT 108 (TC) (concerning occupation of property by a partnership) are examples. If the edges are now blurred between the different business activities a taxpayer is conducting, is there potential that investment activity purposefully kept separate from the (mainly) trading business will now be considered by HMRC to be part of a composite business operation? If so, HMRC may themselves ‘do a Balfour’ and argue that the taxpayer should ultimately be treated as running a single business that includes his otherwise separate investment activities.

Excepted assets s112 IHTA 1984

To establish the value of ‘relevant business property’ for the purposes of BPR, s.110 Inheritance Tax Act (IHTA) 1984 provides that we apply a net asset test (including goodwill). Assets are only included if they are ‘used in the business’ (s110(b)). Once we have ascertained the ‘relevant business property’ and are satisfied it is wholly or mainly trading under s105(3) IHTA 1984, we must consider the specific assets that make up that business or business interest.

S112 IHTA 1984 eliminates assets forming the relevant business property at the time of transfer but which have not been used wholly or mainly as such throughout the previous two years, nor realistically required for the future of the business. In practice it may be hard to argue that assets are excepted if they are managed in a business-like way as part of the composite business operation.

That said, could HMRC argue that (while accepting the business as a whole qualifies as relevant business property within s105(3) IHTA 1984), the trading activity could continue without the investment asset; the income from the trade outweighs the income from the investment (following Balfour); and because the investment income has been drawn down by the taxpayer, the investment asset has not been used mainly in the business throughout the whole of the last two years and, as such, was not required for the future of the business?

Whose business is it?

In Balfour, the First Tier Tribunal decided that ‘Lord Balfour used the trust assets as part of the overall business enterprise carried on by him for gain’, noting that s49(1) IHTA 1984 applied and referring to Fetherstonaugh & Ors(Finch) v IRC 1984 STC 261, which confirmed that for s110 IHTA 1984, ‘assets used in the business’ can include assets other than those owned personally.

The First Tier Tribunal decided that the trustees should be, by virtue of Lord Balfour’s beneficial entitlement to the trust assets for IHT purposes at s49(1) IHTA 1984, treated as holding a business interest within s105(1)(a) IHTA 1984 and that the trust assets were ‘used in the business’ within s110(b) IHTA 1984. The separate legal title between the trustees and Lord Balfour did not mean there were two separate businesses.

HMRC accept, following Fetherstonaugh, that 100 per cent BPR at s105(1)(a) IHTA 1984 can apply (rather than 50 per cent at s105(1)(e) IHTA 1984) where trust assets form part of the qualifying life tenant’s business and are part of the transfer of value on death. Section 110 IHTA 1984 will treat the trust assets as forming part of the net value of the relevant business property.

There is no such aggregation with a (non-qualifying) life tenant’s estate for relevant property trusts. Even the 50 per cent relief may not be available (under s105(1)(e)) if the life tenant cannot be said to be ‘beneficially entitled’ to an interest in possession.

Trustees of relevant property trusts containing property used in a business (at s110 IHTA 1984) must think carefully as to the availability of BPR on exit or principal charges. Much will depend upon who is running the business. For trustees to ‘do a Balfour’, taking into account assets owned outside of the trust, they are likely to need to run the business themselves, or be in partnership with the beneficiary running the business. For entirely passive trustees (as in Balfour) it seems unlikely that BPR would be available.

Creating an overlying partnership is sometimes seem as a panacea to these issues on the basis that each partner then owns relevant business property within s105(1)(a) IHTA 1984 as an ‘interest in a business’. While such structures can assist if they fit the reality of the situation, care must be taken, and all other taxes (such as Stamp Duty Land Tax and CGT) considered.

Not everyone seeking to ‘do a Balfour’ will necessarily be able to arrange their business activity so that the desired conclusion can be reached

In partnership situations involving trusts where s49(1) IHTA 1984 applies, HMRC argue that, following Fetherstonaugh, only 50 per cent BPR at s105(1)(d) IHTA 1984 is available as the trust assets are deemed to belong to the life tenant for IHT and must therefore be used in his business rather than capable of being an interest in a partnership within s105(1)(a) IHTA 1984.

In both Finch and Balfour, the trusts were Settled Land Act trusts and the Balfour decision detailed at length the specific rights of management and control that the terms of the trust granted to Lord Balfour. All of these points assisted the taxpayer in arguing that there was a single composite business. It may not be possible to argue the same level of control in relation to most non-Settled Land Act trusts. Consideration could be given to trustee delegation under s9 of the Trusts of Land and Appointment of Trustees Act 1996, which may assist by putting the life tenant in the position of managing the business.


In the modern diversified agricultural community, many landowners will admit that they are predominately landlords rather than farmers or traders because that is where the preponderance of effort lies. Clients who do not wish to suffer IHT on investment assets must consider carefully whether it is worth risking full BPR on their trading business with a gamble on relief for, say, some cottages. HMRC v Trustees of the Nelson Dance Family [2009] EWHC 71 (Ch) is potentially helpful to strip out such assets, and could perhaps be used to test how muddied the trading waters have become, by transferring assets into trust for the next generation with a value just in excess of the available nil-rate band.


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