Bad news for the serviced offices sector
There has been a further important Tribunal decision (The Trustees of the David Zetland Settlement v HMRC) which will adversely affect property based businesses ability to claim Business Property Relief (BPR) from Inheritance Tax – potentially affecting a great deal of Trust and Will planning.
This is the first BPR tribunal decision on serviced offices, which in the past have generally been understood to attract the relief. The business in question was operated by the trustees of a settlement and consisted of a large commercial building divided into units let to approximately 50 tenants on flexible leases with additional services such as restaurant and gym, porter services and meeting spaces.
The judge considered that the non-investment activities (i.e. the restaurant/gym etc.) would need to constitute more than 50% of the business to satisfy the test for relief. This test was framed in terms of income generated – a test that few serviced office businesses are likely to be able to satisfy.
It is pretty clear from this case that to avoid being ‘wholly or mainly’ investment any trading activity in relation to a lettings business is going to have to be very significant, ideally more than 50% of total income. Providing a handful of additional services to attract and retain tenants will just be considered the accepted actions of a landlord.