At first glance, the business considered by the Upper Tribunal in The Executors of Keith Denis Lewis Beresford v HMRC looked very different from an ordinary commercial letting operation. Four floors of a London office building were divided into serviced offices, customers received reception and telephone-answering support, offices could be reconfigured to suit their requirements, and additional facilities ranged from meeting rooms and server space to catering, postage and courier services. The serviced-office operation generated most of the company’s turnover and required considerably more day-to-day activity than simply granting a lease and collecting rent, yet the Tribunal concluded that the business was still mainly making or holding investments and therefore did not qualify for inheritance tax business property relief.
The judgment is important because it shows how far a property-based business can move beyond conventional letting without necessarily crossing the line from investment into a qualifying non-investment business. It also confirms that long working hours, substantial turnover, active management and a broad range of customer services are not decisive in themselves, because the Tribunal’s attention will eventually return to a more fundamental question: what, in commercial terms, were the customers principally paying to receive?
A substantial serviced-office operation
Mr Keith Beresford owned all the shares in Fiveteam Limited, which in turn owned Ninecourt Limited. Ninecourt’s principal asset was a six-floor commercial building at 16 High Holborn in London, acquired in 2008. From 2010, two floors covering approximately 11,000 square feet were let conventionally to commercial tenants, while the remaining four floors, covering approximately 21,000 square feet, were operated as serviced offices through Orega Management Limited, acting as Ninecourt’s agent. Following Mr Beresford’s death in September 2018, his executors claimed business property relief in respect of the value attributable to his shares, but HMRC determined that the relief was unavailable because Ninecourt’s business consisted wholly or mainly of making or holding investments.
The serviced-office arrangements were extensive rather than incidental. Orega advertised the offices, negotiated with prospective customers, collected payments, employed staff and managed the centre, while customers occupied identified offices accessed through secure key fobs. There were approximately 42 separate offices, generally occupied by between seven and 20 businesses at any one time, with the price usually calculated by reference to the size of the office and the number of workstations it could accommodate. Ninecourt retained the right to move customers between offices and could reposition partitions when different layouts were required, although the evidence showed that customers were not commonly moved once they had taken possession of an office.
Customers also received a package of standard services, including furnished accommodation, reception facilities, telephone answering, kitchens, cleaning, office equipment, heating, electricity and air conditioning. Other facilities, including meeting rooms, server space, telecoms, catering, secretarial assistance, postage, couriers and photocopying, were charged through separate contract service fees. In turnover terms, the serviced-office side of the operation was plainly significant, accounting for approximately 75% of Ninecourt’s turnover during the five-year period considered by the Tribunal and producing substantially more gross profit than the conventionally let floors in four of those five years.
Why business activity was not enough
The statutory issue arose under sections 104 and 105 of the Inheritance Tax Act 1984. Although unquoted company shares can constitute relevant business property, section 105(3) excludes shares where the company’s business consists wholly or mainly of dealing in land, buildings or securities, or of making or holding investments. The question was not whether Ninecourt carried on a business in the ordinary sense, because nobody disputed that it did, but whether the business, viewed as a whole, remained mainly an investment business despite the scale of the serviced-office activities.
The Upper Tribunal was careful not to create an automatic rule against businesses involving land. It confirmed that there is no legal presumption that every business exploiting property for profit must be treated as an investment business, and that the correct exercise is to examine the facts and place the business at the appropriate point on a broad spectrum. At one end sits the conventional property owner who grants occupation rights and receives income, while businesses such as hotels and shops lie towards the other end because the premises provide the setting in which a wider commercial service or trade is conducted. Between those two examples are numerous hybrid businesses in which property occupation and customer services are supplied together.
When carrying out that evaluation, factors such as the capital employed, the work undertaken by employees, the turnover and profits generated by the different activities, and the overall commercial context can all be relevant. The Tribunal nevertheless stressed that this is not a mechanical exercise in which whichever side wins the greatest number of factors also wins the case. The evidence must be considered in the round, with the importance given to each factor depending upon the nature of the particular business.
That distinction explains why the intensity of the operation did not settle the Beresford appeal. An investment can be actively managed without ceasing to be an investment, and much of the work undertaken in a property business may still relate to finding occupiers, negotiating agreements, collecting income, maintaining accommodation and preserving the value of the underlying asset. The volume of work may demonstrate that a business is substantial and professionally operated, but it does not necessarily reveal whether its essential character is investment or something else.
What were the customers really buying?
The decisive part of the case concerned the facility fee charged to serviced-office customers. The executors argued that customers were purchasing an integrated service package rather than paying for occupation of property, pointing to the reception facilities, communications services, office equipment, flexible terms and the ability to alter the accommodation. The agreements were expressed as licences rather than tenancies, denied customers any proprietary interest in the building and allowed Ninecourt to allocate a different office where necessary.
The First-tier Tribunal, whose factual findings were largely upheld on appeal, considered that the primary element of the transaction remained the customer’s use of an identified office. Individual room numbers appeared in customer agreements and invoices, secure fobs controlled access to the relevant areas, and pricing was closely related to the amount of floor space occupied or the number of workstations that the office could theoretically contain. Although Ninecourt could move customers, that did not happen frequently, and the commercial reality was that a customer normally acquired the use of a particular fitted-out room for the duration of the agreement.
The Upper Tribunal rejected the argument that an investment activity could arise only where a formal tenancy or proprietary right of occupation had been granted. The contractual label was not conclusive, nor was it necessary for customers to acquire an interest in the land comparable to a conventional lease. The substance of the arrangement was that they paid a periodic charge for the use of office space within the building, accompanied by a package of facilities and services, and the Tribunal was entitled to decide which part of that package predominated.
The considerable price difference between the serviced offices and the conventionally let floors did not alter that conclusion. The executors argued that the premium demonstrated the value of the services, but the Tribunal considered that the higher income also reflected the smaller areas available to individual customers, the shorter contractual commitments, the flexibility of the arrangements and the fact that the offices were already partitioned, decorated, furnished and ready to occupy. The premium therefore could not be attributed entirely to the additional services, particularly when a central part of the commercial attraction was the ability to obtain suitable office accommodation without accepting the cost and long-term obligations of a conventional lease.
The First-tier Tribunal got part of the analysis wrong
The executors did establish that the First-tier Tribunal had made an error of law when it classified the provision of heating, electricity and air conditioning as investment management activities. The Upper Tribunal drew a clear distinction between work carried out to maintain or enhance property as an investment and services supplied for the use and benefit of customers. Heating an office for its occupants, supplying electricity and providing air conditioning fell into the latter category, even though the cost was included within the facility fee rather than separately metered or invoiced.
This was more than a minor correction because the First-tier Tribunal had itself described the case as finely balanced, and the misclassification could have affected its decision about the nature of the facility fee. The Upper Tribunal therefore set aside the earlier decision and reconsidered the outcome for itself, taking account of the fact that the utilities were genuine non-investment services rather than aspects of managing the property.
The correction did not, however, change the result. Most of the activities associated with the facility fee could still properly be described as managing and providing the office accommodation, while the heating, electricity and air conditioning were not sufficiently important within the overall package to alter its commercial character. The separately charged contract services were accepted as trading activities, but the parties had agreed that the classification of the much larger facility fee would determine on which side of the statutory line the business fell.
Having reconsidered the facts, the Upper Tribunal decided that a reasonable businessperson would regard the facility fee as income from an investment because the predominant return was still being received for allowing customers to occupy offices within the building. Ninecourt’s business, considered as a whole, was therefore mainly one of making or holding investments, so the Tribunal confirmed HMRC’s determination and dismissed the executors’ appeal.
The uncomfortable lesson for property-based businesses
The judgment does not mean that every serviced-office company, holiday accommodation operator or other property-based enterprise must fail the business property relief test. The Upper Tribunal expressly rejected such a presumption, and every case will continue to depend upon the precise balance between the exploitation of the property and the provision of genuinely substantive services. The result nevertheless demonstrates how difficult it can be to show that services have overtaken occupation as the main commercial substance of the business.
Nor will the case necessarily be won by demonstrating that an operation employs staff, demands constant attention, charges considerably more than a conventional landlord or accounts for most of a company’s turnover and profits. Those facts all formed part of the executors’ case, but they could not displace the Tribunal’s conclusion that customers were still principally buying access to fitted-out office space on flexible terms.
The most revealing evidence in future disputes is therefore likely to concern the customer proposition itself: how prices are calculated, what customers genuinely value, how extensively the additional services are used, how much revenue and profit those services produce, and whether the property is merely the platform from which a wider service is delivered or remains the principal thing for which customers pay. Beresford confirms that the answer will not be found in the description attached to the business or the wording printed at the top of the customer agreement, but in the commercial substance of what is actually being supplied.
Cases such as this are a reminder that inheritance tax outcomes often turn on the detailed facts of the business rather than the label attached to it. For landlords with substantial portfolios, particularly those thinking about retirement, succession or passing wealth to the next generation, it is worth reviewing whether their present ownership and business arrangements still support their longer-term objectives.
A Property118 consultation provides an opportunity to step back from the day-to-day management of the portfolio, consider the commercial and family issues that matter most, and identify the areas where further tax or legal advice may be required.
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