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First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Earl of Balfour v Revenue & Customs  UKFTT 101 (TC) (14 May 2009)
Cite as:  STI 2028,  WTLR 1117,  UKFTT 101 (TC),  SFTD 374
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 UKFTT 101 (TC)
Appeal number SC/3212/2007
Inheritance Tax; business property relief; liferent; partnership; replacement property; Inheritance Tax Act 1984 sections 49, 105, 106, 107, 110
ANDREW MICHAEL BRANDER, Representative of the late
Rt. HON. GERALD ARTHUR JAMES, Fourth Earl of Balfour Appellant
TRIBUNAL: J GORDON REID QC, F.C.I.Arb
Sitting in public in Edinburgh on 9-11 December 2008
Julian Ghosh, Advocate (QC of the English Bar), instructed by Turcan Connell, Solicitors, Edinburgh for the Appellant
Roderick N Thomson QC, instructed by HMRC Solicitors' Office, for the Respondents
(1) Subject to the following provisions of this section and to sections 106, 108, 112(3) and 113 below, in this Chapter "relevant business property" means, in relation to any transfer of value,-
(a) property consisting of a business or interest in a business:
(b) securities of a company .............
(bb) any unquoted shares in a company
(d) any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by a .......... partnership of which he then was a partner: and
(e) any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by the transferor and was settled property in which he was beneficially entitled to an interest in possession.
(3) A business or interest in a business, ........., are not relevant business property if the business .............. consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks and shares, land or buildings or making or holding investments.
Property is not relevant business property in relation to a transfer of value unless it was owned by the transferor throughout the two years immediately preceding the transfer.
(1) Property shall be treated as satisfying the condition in section 106 above if-
(a) it replaced other property and it, that other property and any property directly or indirectly replaced by that other property were owned by the transferor for periods which together comprised at least two years falling within the five years immediately preceding the transfer of value, and
(b) any other property concerned was such that, had the transfer of value been made immediately before it was replaced, it would (apart from section 106) have been relevant business property in relation to the transfer.
(2) In a case falling within subsection (1) above relief under this Chapter shall not exceed what it would have been had the replacement or any one or more of the replacements not been made.
(3) For the purposes of subsection (2) above changes resulting from the formation, alteration or dissolution of a partnership ........ shall be disregarded.
For the purposes of this Chapter-
(a) the value of a business or of an interest in a business shall be taken to be its net value;
(b) the net value of a business is the value of the assets used in the business (including goodwill) reduced be the aggregate amount of any liabilities incurred for the purposes of the business:
(c) in ascertaining the net value of an interest in a business, no regard shall be had to assets or liabilities other than those by reference to which the net value of the entire business would fall to be ascertained.
A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists.
Notice of Determination
A Lord Balfour's interest in Whittingehame Farm Co (the partnership formed with Andrew Brander and commencing on 10/11/02) was not relevant business property for the purposes of section 104 having regard to the provisions of section 105(3) of the 1984 Act.
B In the alternative, Lord Balfour's interest in that partnership was not relevant business property for the purposes of section 104 having regard to the provisions of section 106.
C In the alternative-
(1) the estate management and farming activities were managed by Lord Balfour as his single composite estate management business immediately prior to the formation of the partnership,
(2) that business was not relevant business property immediately prior to the partnership having regard to the provisions of section 105(3) of the 1984 Act.
(3) the partnership replaced that business,
(4) as none of the property replaced by the partnership was relevant business property immediately before it was replaced Lord Balfour's interest in the partnership was not relevant business property for the purposes of section 104 having regard to the provisions of section 107.
D In the alternative-
(1) the estate management and farming activities were not managed by Lord Balfour as his single composite estate management business immediately prior to the formation of the partnership,
(2) the estate management activities were not relevant business property immediately prior to the formation of the partnership as it was not property falling within any of the meanings in section 105(1); or was property consisting of a business but was a business carried on otherwise than for gain or was property consisting of a business but was a business consisting wholly or mainly of making or holding investments,
(3) the partnership replaced the estate management and farming activities
(4) having regard to the sections 106 and 107(1), (2) and (3), at his death Lord Balfour's interest in the partnership was relevant business property for the purposes of section 104 to the extent only that his interest replaced property which immediately before the establishment of the partnership would have been relevant business property.
1. In terms of the Trust established by the 1st Earl of Balfour's will dated 1 January 1923 and relative codicils registered in the Books of Council and Session on 24 March 1930 ("the Trust"), The Right Honourable Gerald Arthur James, 4th Earl of Balfour and Viscount Traprain ("Lord Balfour" or "the deceased") had been a liferenter of Whittingehame Estate, East Lothian ("the Estate"), a traditional Scottish landed estate.
2. Lord Balfour acquired his liferent interest in the Estate on his father's death on 27 December 1968.
3. From 27 December 1968 until 6 November 2002 the deceased enjoyed a liferent over the whole of the Trust Estate, heritable and moveable.
4. From 27 December 1968 until his death the deceased enjoyed a liferent over the whole moveable Trust Estate.
5. The moveable Trust Estate included corporeal moveable property comprising (i) a valuable Burne-Jones panel, (ii) furniture valued at £147,870 at the date of Lord Balfour's death, and (iii) part of the Balfour Archive, a valuable collection of personal and political papers. Additionally, there was incorporeal moveable property including cash, debtors and pre-payments with a total value at the date of Lord Balfour's death of £80,352.
6. Lord Balfour died on 27 June 2003.
7. Subject to the declarator hereinafter described and until its date on 6 November 2002, the Trust Estate included the whole heritable property of the landed estate, including Whittingehame Tower Farmhouse, Whittingehame Mains and Eastfield Farms, Luggate, Papple and Overfield Farms, together with buildings associated therewith and certain further grazings and woodlands. In addition there were a number of let houses and cottages.
8. For a number of years prior to 10 November 2002 the deceased had operated in hand farming at Whittingehame Mains and Eastfield Farms under the name of Whittingehame Farming Company. From time to time the deceased had operated these farms in partnership with another. In particular, during the period prior to 28 September 1999 Whittingehame Farming Company operated as a partnership between the deceased and George Thomson. The partnership terminated with Mr Thomson's death on 28 September 1999. Thereafter, until 10 November 2002 the deceased operated these farms without a partner, continuing to operate Whittingehame Farming Company for the purpose.
9. The trustees of Whittingehame Estate Trust have had prepared on their behalf periodic accounts during the subsistence of Lord Balfour's liferent interest.
10 The agricultural lettings of Luggate, Papple, and Overfield Farms commenced on 28 November 1952, 28 November 1954, and 28 November 1953, respectively. The table on page 6 of the report and valuation by Messrs Bidwells pertaining to Whittingehame Estate dated November 2003 is true and accurate as to the matters it describes.
11. Prior to November 2002, separate bank accounts were maintained for Whittingehame Farming Company and the Whittingehame Estate Trust.
12. The operations of the Estate Trust and of Whittingehame Farming Company were separately registered for VAT purposes.
13. Whittingehame Estate Trust was first registered for VAT in March 1976 (VAT registration number 271 9545 36). It was and remained registered as a non-profit making body. This registration was in the name of the Trustees of the Whittingehame Estate Trust.
14. Whittingehame Farming Coming (VAT registration number 269 8479 84) was registered for VAT purposes in the name of Lord Balfour during the period from 28 September 1999 to 10 November 2002, and Lord Balfour and Andrew Michael Brander (as partners of the partnership referred to at paragraph 20 below) until Lord Balfour's death on 27 June 2003.
15. There was a composite insurance policy covering the whole of the Estate. The insurance premium was apportioned between Whittingehame Farming Company and the Whittingehame Estate Trust prior to 10 November 2002.
16. In December 1999 Bidwells, Property Consultants, 5 Atholl Place, Perth, were appointed by Lord Balfour to take over the factoring/management of Whittingehame Estate.
17. Bidwells invoiced Whittingehame Farming Company and Whittingehame Estate Trust separately.
18. In November 2003 Messrs Bidwells produced a report and valuation in respect of Whittingehame Estate. Appendix 4 thereof provided a schedule of cottages and other premises on the Estate, 28 in number. The first 26 correspond to those cottages identified in a schedule produced by the District Valuer, elsewhere herein described. In respect of those 26 cottages and other premises the Bidwells' schedule is true and accurate as to the property identified, the commencement of letting, the type of letting, the rent per annum as at the date stated, the review date and the tenant.
19. On 6 November 2002 the House of Lords declared the deceased to be the fee simple proprietor of the heritable estate hitherto treated as Trust heritage, pursuant to section 47 of the Entail Amendment (Scotland) Act 1848.
20. On 16 February 2003 by written agreement the deceased entered into a partnership with Andrew Michael Brander. The effective date of commencement of that partnership was backdated to 10 November 2002. The agreement is produced.
21. The partnership agreement of 16 February 2003 was to the effect that the partnership name would be Whittingehame Farming Company.
22. The partnership agreement provided for the introduction of initial capital into the business on the basis that (a) the heritable property comprising the whole of Whittingehame Estate belonging to the deceased was contributed and credited to Partnership Capital Account A, and belonged to the deceased; and (b) the capital of the operation previously known as Whittingehame Farming Company, one half having been gifted to the said Andrew Michael Brander by the deceased, was contributed equally by the two and credited to Partnership Capital Account B, and belonged to them equally.
23. With effect from 10 November 2002 the capital value of the whole heritable estate of Whittingehame Estate was treated as a fixed asset of Whittingehame Farming Company in the partnership accounts, its initially stated value being £3 million.
24. With effect from 10 November 2002 the capital introduced to Partnership Capital Account B was £198,117, this being the closing net assets balance represented by the capital and current accounts in the Whittingehame Farming Company accounts for the period to 10 November 2002.
25. After 10 November 2002 all non-heritable property of the Estate Trust remained in the Trust
26. The list of properties owned by Whittingehame Farming Company, being for the avoidance of doubt the partnership between the deceased and Mr Brander, as at the date of death is described in the valuation report by Bidwells that is produced. A return was made to the Inland Revenue Capital Taxes Office in respect of certain property and it is produced. The said return gave suggested valuations for the various properties comprising the Estate on an open market value basis.
27. By letter of 12 July 2005 the District Valuer intimated agreement in respect of the various properties. In relation to items a-f parties are agreed on the basis set out in the said letter, but those matters form no part of the subject matter of the present appeal. Items h and i do not form part of the subject matter of the present appeal.
28. In the said letter of 12 July 2005 the District Valuer confirmed agreement of an open market value for item g, being 26 houses and cottages, 23 of which were let at the date of the deceased's death, in the sum of £2,818,000. He provided a schedule to the letter which, inter alia identified the 26 houses and cottages comprising item g. The schedule is accurate as to the identification of those properties. Parties are agreed as to that open market value for item g. The treatment of this property for inheritance tax purposes is at the heart of the present appeal.
29. Whittingehame Estate, which extends to about 771.85 hectares (1907.25 acres), is a low ground agricultural estate in East Lothian, with a historic Tower House dating from the late fifteenth century. It was acquired by the Balfour family in about 1817 and then extended to some 10,000 acres. Large parts of the estate had to be sold in the 1930s and the 1960s to pay estate duty. Before Lord Balfour's death there were two in-hand farms (Whittingehame Mains Farm and Eastfield Farm), three let farms (on secure agricultural tenancies), some 26 let houses and cottages (mainly let on short assured tenancies), and two sets of business premises. The in-hand farms at Whittingehame Mains and Eastfied extend to about 269 hectares. The three let farms at Papple, Overfield and Luggate extend to about 371 hectares. There are also policy parks (let on a seasonal basis) and valuable sporting rights attached to the Estate.
30. The in-hand farms the policy parks, and the woodlands extend to about 393.6 hectares while the let farms extend to about 371 hectares.
31. The first Earl of Balfour's Trust Disposition and Settlement provided inter alia as follows:-
"IN THE SEVENTH PLACE, With regard to the whole rest and residue of my means and estate heritable and moveable, real and persona, wherever the same may be situated, I direct my Trustees to .......pay or apply the whole nett revenue or income thereof for behoof of the following series of heirs .... each for his or her liferent use allenarly videlicet:- My brother ............... whom failing .......... in fee, and that in the manner for the purposes, with the faculties and subject to the powers conferred by me and after expressed: (First) I hereby declare that all of the liferents successively before provided shall be for alimentary use only, and the respective rights and interests shall not be assignable nor affectable by the debts or deeds of the liferenters or the diligence of creditors: (Second) It is my wish and intention and I direct my Trustees that my said brother Gerald .......shall be entitled to the whole past due and current rents feuduties and other profits of my landed estates without reference to the crops or years for which they may be payable as if such liferenter were absolute proprietor..........
(Third) I desire and direct my Trustees to put my said brother Gerald .........into the personal occupancy and liferent use and possession, not only of my landed estates of Whittingehame and others in Scotland............And I desire and direct my Trustees as far as possible consistently with the terms of this Trust to confer upon my said brother Gerald ..... all the rights, powers and privileges that are conferred by law upon liferenters my wish and intention being that the successive liferenters should have the same rights, powers and privileges and that under the same obligations as if I had conveyed the said lands and estates in Scotland ......... directly to them in liferent in their order successively: and without prejudice to the foresaid rights, powers and privileges but in addition thereto I authorise my Trustees to confer upon each of the successive liferenters power to open up and work minerals and to let the subjects liferented including such minerals and that on lease at a fair rent, but without grassum or other consideration for granting such lease other than the rent or royalties and not exceeding the periods following videlicet:- In the case of (One) Agricultural subjects, nineteen years: (Two) Minerals....(Three) the Mansion House.............. and all other house property furnished or unfurnished... Ten years: and (Four) Shootings and fishings, Ten years: Declaring that it shall be the duty of my Trustees to see that the buildings, fences, and others on the said estates ..... are kept by the successive liferenters in proper repair and the whole buildings .......... duly and fully insured in the name of my Trustees........
(Fourth) Whereas I have at present on hand and in my own occupancy the Home Farm of Whittingehame (which includes Overfield Farm) it is my wish and desire that means should be provided to permit of the same being carried on as I have been in use to do, therefore I hereby confer upon my Trustees full power and authority with the consent of the liferenter for the time to carry on the Home Farm (including Overfield Farm) or to let the same or any part thereof for such term or terms as they think fit, in which latter case the whole stock, crop and implements of husbandry on said farm including as aforesaid, or such part thereof as may be necessary shall be realised and disposed of and the nett proceeds shall fall into the residue of my means and estate and be invested and managed by my Trustees as part thereof, and any loss incurred in the course of carrying on or managing the said farm shall be borne by the liferenter for the time, and all profit shall belong to him or her as his or her own property........."
32. Lord Balfour in his daily business activities made no demarcation between the Whittingehame Farming Company ("WFC") and the Estate. Lord Balfour held keys for all properties on the Estate. Much of Lord Balfour's correspondence was written on notepaper simply headed Whittingehame Estate Office. That correspondence also shows that Lord Balfour met the costs of running the Estate with, generally, no particular distinction being drawn between capital improvements and repairs After George Thomson's death, Lord Balfour ran the in-hand farms on a contract farming basis; the contract farming agreement was between Lord Balfour and the contractor. Lord Balfour's own view appears to have been that before the Trust came to an end in 2002 everything was run as one business.
33. There was no strong demarcation for staff either. Lord Balfour handled all matters relating to staff. Lord Balfour's secretary dealt with all aspects of the Estate and the WFC. Another illustration of this lack of any clear line of division is the employment of David Young who was a general worker on the Estate from at least 1968 until his death in 1997. PAYE records reveal that his employer was Lord Balfour but his wages were paid from the trust funds of the Estate and not WFC. There was no apportionment of his salary. The gamekeeper was employed by Lord Balfour. His responsibilities must have ranged across the whole estate and certainly beyond the in-hand farms.
34. WFC was concerned solely with in-hand farming which included rent from cottages on the two in-hand farms, until 2001 when the income from the cottage rents began to be remitted to the Estate.
35. Robert Balfour is a chartered surveyor and second cousin of Lord Balfour. Mr Balfour was a trustee under the 1923 Trust Deed from the mid 1980's. Mr Balfour's father had been a Trustee from the outset. The Trustees had no active role to play as Lord Balfour occupied and ran the whole Estate as if he were the owner; in particular, Lord Balfour dealt with the letting of residential properties on the Estate through Anderson Strathern, solicitors, and before them, Strathern and Blair; Mr Balfour as trustee, was never called upon to sign any lease; the Trustees were not authorised signatories on any bank account; the income and expenditure of the Estate were dealt with by Lord Balfour; Lord Balfour dealt with all forestry work; property disposals were instigated by Lord Balfour; Lord Balfour's wishes on estate matters, which Lord Balfour regarded as his own business, were invariably acceded to by the Trustees. Very few meetings of the Trustees took place. Trust Accounts were issued to the Trustees once they had been approved by Lord Balfour; these accounts did not include the in-hand farming operations; The correspondence produced also shows that the Trust solicitors in effect took instructions from Lord Balfour rather than the Trustees. The Trustees became involved in formal or administrative matters only.
36. Bidwells were appointed in 1999. They provided inter alia a book keeping service, preparing annual accounts and VAT returns; they prepared separate annual accounts for the Estate and the WFC; there were separate cheque books and thus accounts for WFC and the Estate; Lord Balfour was an authorised signatory on both accounts. Mr Donald produced an analysis of annual accounts which showed that income from crop and cattle sales, subsidies, grazing and potato lets, cottage and some let farms and some wayleaves was received by WFC; and income from some let farms, some cottages, woodlands and some wayleaves was paid to the Estate; there was a composite insurance policy for the whole Estate; the premium was apportioned between the WFC and the Estate. Bidwells carried out the day to day management and reported to Lord Balfour on all matters (letter of appointment dated 22/12/99); they managed the woodlands, the let housing stock and the agricultural tenancies although Lord Balfour was still involved in various aspects of these activities; and instructed various property repairs and maintenance on the Estate.
37. Income from the in-hand farming operations exceeded the income generated by the letting of property (cottages etc). The majority of cottage lets were on short assured tenancies, as already noted. Mr Donald spent the bulk of his time on the farming operations rather than on the letting side. He understood the whole operation on the Estate to be Lord Balfour's business. The balance of labour expended by employees on the Estate related to farming operations rather than the lettings. If one took into account management time, the balance was the other way round. However, in 2001 and 2002 Bidwells spent a little over three quarters of their time on farming and forestry matters and a little less than one quarter on property letting and maintenance matters. They rendered separate fee notes to the WFC and to the Estate
38. WFC was concerned solely with in-han12d farming which included rent from cottages on the two in-hand farms, until 2001 when the income from those cottage rents went to the Estate. The following Table summarise trading and letting income between 2000 and 2002.
|Year||Total Trading Turnover||Letting Turnover|
|2000¹||£121.566 of which
Treated as Trust
To the Trustees
|£67,009 of which £64,026 was
attributed to cottage,
farm and other rents and wayleaves and treated as trust income payable to
the Trustees; the balance being grazing income cottage and farm rents
and wayleaves paid to the WFC
|2001²||£119,804 of which £3,585
was treated as such Trust income
|£82,027 of which £76,520 was
treated as Trust income
|2002³||£101,966 of which £1,187 was
treated as such
|£95,266 of which £78.722 was treated as
|£119,364 of which £196 was
treated as such
|£96,248 of which £75,448 was treated as
39. The nature and scope of the business activities being carried out at Whittingehame Estate and the manner in which they were being conducted were essentially the same before 2002 as they were after 2002 until Lord Balfour's death. After Bidwells were appointed, Lord Balfour continued to be involved in the running of the Estate, and the Trustees' role did not change. Bidwells reported to and took their instructions from him.
40. Lord Balfour used trust assets, namely the heritable property, and in particular the let property, in a single composite business carried on by him at Whittingehame. The overall intention was always to make a profit.
Discussion of the Evidence
each part contributing to and supporting the whole. However, it became apparent, after an effective cross-examination, that the basis upon which he held these views was somewhat shaky. He had not seen any tru1st accounts; nor was he informed of the terms of the Trust Disposition and Settlement. He gave no consideration to the existence of the Whittingehame Farming Company, its function or effect on the question of whether the Estate embraced one business or more than one. He was unaware of the staffing arrangements. Nevertheless, his conclusion is consistent with the thrust of most of the evidence I heard. Moreover, his undoubted experience entitled him to make the reasonable comment that Lord Balfour appeared to manage the Estate in a way that was characteristic of his generation.
General Assessment of the Evidence
Business activity on Whittingehame Estate
Wholly or mainly making or holding investments?
Entail Amendment (Scotland) Act 1848
Note 1 Year ended 31/3/00 for WFC and the Trust
² Nine months to 31/12/00 for WFC and year to 31/3/01 for the Trust
³ Year ended 31/12/01 for WFC and year to 31/3/02 for the Trust
? Period from 1//02 to 10/11/02 for WFC and 1/4/02 to 10/11/02 for the Trust [Back]
Note 1 Year ended 31/3/00 for WFC and the Trust ² Nine months to 31/12/00 for WFC and year to 31/3/01 for the Trust ³ Year ended 31/12/01 for WFC and year to 31/3/02 for the Trust ? Period from 1//02 to 10/11/02 for WFC and 1/4/02 to 10/11/02 for the Trust [Back]