This is an appeal by the executors of the will of Elsie Fanny Stedman, who died in August 1998. It concerns the inheritance tax payable on her interest in a company called Dunton Park Caravan Sites Limited (“the Company”). At the time of her death, she held 85 per cent of the shares in the Company. The deceased’s daughter, Mrs Purcell is a director of the Company and has run the business since her father’s death in 1984.

The Company owned and operated a caravan site business. The main components were a residential caravan park, a site for caravan storage, and a club for residents and others. The issue is whether there is an entitlement to 100% business property relief on the transfer of those shares. That depends, in simple terms, on whether or not the business consisted “wholly or mainly of… making or holding investments”. The Special Commissioner (Dr John Avery Jones) held that it was not; and therefore that business property relief was available. That decision was reversed by Laddie J. The executors appeal to this Court.

This is the first time this question has been considered by the Court of Appeal. We have been shown a number of decisions of the Special Commissioners in which varying conclusions have been reached in relation to such businesses. This is perhaps not surprising. One consequence of the relative imprecision of the statutory test is that the right to business property relief may depend on fine distinctions between businesses, which, to their owners, and for most practical and economic purposes, are virtually identical.

No doubt it was such considerations, which led the Revenue, in the context of income and corporation tax, to adopt an extra-statutory concession (B29):

A further consequence of the form of the legislation is that drawing the dividing line in a particular case is a matter for the Commissioners, as the tribunal of fact. Appeal to the High Court is on a question of law only. That requires either the finding of a specific mis-direction as to the law, or a conclusion that the Commissioners have acted “without any evidence or upon a view of the facts which could not reasonably be entertained.” (Edwards v Bairstow [1956] AC 14, 29).

The relevant provisions are in the Inheritance Tax Act 1984 (“IHTA 1984”). Inheritance tax is charged on a “transfer of value” made by an individual (ss 1,2). On the death of any person, tax is charged as if, immediately before death, there were a transfer of value equal to the value of the person’s estate (s 4). Part V of the Act gives various forms of relief from tax, one of which is relief on business property.

Section 104(1) provides:

“Relevant business property” is defined by section 105 which, insofar as relevant, provides:

The appeal turns on the correct interpretation of the emphasised words, as applied to the facts in this case. For ease of presentation, to describe activities falling either side of the statutory line, I shall use (as convenient, if inelegant, epithets) the terms: “investment” and “non-investment”.

The area of dispute is very narrow. Starting from the wording of section 105(3) three points seem clear (and, I think, are undisputed):

The business did not consist of, or include, “dealing in… land or buildings”, or “making… investments”;

It did include “holding investments”, insofar as it involved holding land for the purpose of receiving licence fees for stationing mobile homes and for caravan storage; but

It was not “wholly” that of holding investments, insofar as it undoubtedly included some other activities carried on for profit (such as the sale of caravans, and running the club).

The question, therefore, is whether the business was “mainly” that of holding investments. For this purpose, the principal areas of debate have been: first, the correct allocation between “investment” and “non-investment” of the various activities involved in operating the site, including, in particular, the services provided for the residential park; and, secondly, in the light of that allocation, whether the “investment” element of the business was predominant.

Although it is common ground that the exploitation of a proprietary interest in land for profit is in principle an “investment” activity, I would agree respectfully with the Commissioner’s comment as to the wide “spectrum” involved; and with his view that cases relating to different taxes and different subject matter are unlikely to be helpful. He said:

I would also agree with the Commissioner’s comment on the previous Special Commissioner decisions that they are generally distinguishable, either on the facts, or because the arguments were different. He said:

The only one of these cases which came to the High Court (before the present case) was Weston v IRC [2000] STC 1064, in which the Commissioner’s decision was upheld by Lawrence Collins J. With respect to the Judge, the basis of his decision (that the issue was one of fact for the Commissioner) was unremarkable. The present issue, as to the status of the services, had not been raised before the Commissioner, and was not permitted to be raised in the High Court.

Mr McKay has prayed in aid the Judge’s division of section 105(3) into three questions:

Another recent High Court decision referred to in the present case, by both the Commissioner and the Judge, was Cook v Medway Housing Society [1997] STC 90 (Lightman J). Again, without disrespect, I do not find it necessary to discuss it in detail. It related to a different statutory and factual context, and again the decision (upholding the Commissioner’s finding on the facts) was unsurprising. I note, however, that both the Commissioner and the Judge were influenced by a passage in that judgment:

One Special Commissioner decision, Martin v IRC [1995] STC (SCD) 5 (Stephen Oliver QC), requires more detailed discussion. Apart from the respect due to the particular tribunal, this was seen as providing guidance for later cases before the Commissioners. It is also the main foundation for Mr McKay’s arguments in this appeal as to the treatment of services provided by the owners, and the relevance of the terms of the lease or licence.

The case also concerned the availability of business property relief, but in relation to a business of letting industrial units on three-year leases. It was argued that the landlord’s activity in managing and maintaining the properties was sufficient to take it out of the “investment” category, on the basis that it was “active” rather than purely “passive” property investment. Mr Oliver rejected that contention. That conclusion is unimpeachable. On any view, the business was at least “mainly” that of holding property for letting, and thus for investment.

The relevance of the case for present purposes is in relation to the treatment of the various activities of the owner. Mr Oliver divided them into three categories:

Those directed at “making” the investment (finding tenants, negotiations over rent, granting leases, taking surrenders and the like);

“Compliance activities” which the owner had to carry out as landlord (such as keeping the exterior painted and in good repair);

“Management activities” (such as day-to-day maintenance of the exterior and the common areas, and “policing” the common areas to ensure that tenants complied with the terms of their leases).

As to the third he said:

He concluded:

In making that analysis, Mr Oliver QC relied (as does Mr McKay before us) on observations of Slesser LJ in the Court of Appeal in Fry v Salisbury House Estate Ltd [1930] 1KB 304, 331 (a case better known for the House of Lords decision, reported at [1930] AC 432). In Fry, the company managed a block of buildings, in which the rooms were let out as unfurnished offices. The statutory context was quite different, concerning the distinction under the income tax law as it then stood, between Schedule A (annual value of property) and Schedule D case 1 (trading profits). The question was to what extent the profits of the business were to be treated as covered by the assessment under Schedule A, or could be subject to separate assessment as profits of a trade under Schedule D.

The company had in fact admitted liability under Schedule D in respect of profits from services such as lighting, cleaning and care-taking; so no issue on those matters arose for decision. However, the following comments were made by Slesser LJ (p 331-2):-

Commenting on that passage in the Martin case, Mr Oliver said:-

I have underlined the passages most material to the argument in the present case. They were applied by another Special Commissioner, Mr Everett, when holding that a caravan park did not qualify for relief (Powell v IRC [1997] STC (SCD) 181). In that case the owner carried out the ordinary maintenance and security work of the caravan park, including such activities as grass cutting and painting and cleaning site vans, and helping when the electricity or gas supply broke down. The Commissioner, having cited the passage to which I have referred from Martin, said:

As I have said, I have no doubt as to the correctness of the Martin decision on its own facts. Similarly, as the present Commissioner said (see above), the actual decision in Powell is readily understandable on the facts, in view of the run-down condition of the park and the “low intensity” of the managers’ activity (although that was not the basis of Mr Everett’s decision: p 187c-d).

However, I would make two comments of relevance to the present case. First, I agree in general terms that property “management” is part of the business of “holding” property as an investment (cf Webb v Conelee Properties Ltd (1982) 56 TC 149, 157C-E). In the case of a building held for letting, management no doubt includes the activity of finding tenants and arranging leases or licences, and that of maintaining the property as an investment. But I would not extend that term to additional services or facilities provided to the occupants (such as those referred to by Slesser LJ), whether or not they are included in the lease and covered by the rent. In the case of a building for letting, it is unlikely to be material. They will not be enough to prevent the business remaining “mainly” that of holding the property as an investment.

Where it does matter, in my view, the characterisation of such services depends on the nature and purpose of the activity, not on the terms of the lease (or, where relevant, a site licence). It is true that, in Fry, Slesser LJ noted the fact that the particular services mentioned (cleaning, heating and lighting) were optional under the lease, and that a separate charge was made. That was treated as a reason for not regarding them as “mere incidents” of the tenancy. However, the converse does not follow. There is nothing in that judgment to support the view that, merely because services or facilities are required by the lease, and their cost is included in the rent, they lose their character as services, and become part of the “holding” of the investment.

Indeed, so to hold would be contrary to other authority. We were referred to Shop Investments Ltd v Sweet [1940] 23TC 38, a judgment of Wrottesley J, which was treated as “manifestly correct” by Lord Greene MR in Croft v Sywell Aerodrome [1941] 24TC 126, 143. That again concerned the distinction between Schedule D and Schedule A on rather unusual facts. The appellant company had granted a lease of a cinema, together with fittings, furnishings and plant, but they were not represented by any separate consideration. It was held that the Schedule A assessment should be treated as covering that part of the rent which was properly attributable to the building, and that there should be a separate Schedule D assessment in respect of so much of the rent as was shown to be attributable to furniture and fittings. The fact that they were included in the lease, and covered by the rent, was not determinative of their character for income tax purposes.

Secondly, in any event, caution is needed in drawing a direct analogy between the letting of built units and the licensing of plots in a caravan park. In the former case, the “investment” includes the whole of the site and building, including the occupied units. In the latter, it does not; the “investment” consists solely of the site, and the occupiers provide their own accommodation. In that sense a caravan park is a hybrid. This makes it more difficult to draw a clear line between “investment” and “non-investment” activities. For example, maintenance of the amenity areas of the park is in part designed to maintain the investment, but it is also part of the service provided to the residential occupiers for the enjoyment of their own homes. Normally, it is unnecessary to attempt a precise division between the two functions, but where figures are in issue some form of apportionment may need to be attempted (as in Shop Investments, see above).

Against that background, I turn to a more detailed description of the facts of the present case. The Commissioner, by way of summary of Mrs Purcell’s evidence, referred to eight “activities” carried on by the Company:

The residential homes park. At the time of the deceased’s death this consisted of 167 mobile homes. The caravans were owned by the residents. The Company made a profit from the sale of caravans, and also took a commission of 10 per cent on sales of caravans on the site. I shall return to his description of this part of the business in more detail, since it forms the main area of dispute.

Dunton Park Country Club. This was a club, comprising a bar open every evening. and a suite available for hire for private functions. Membership was available for a fee to residents and non-residents of the site. It is common ground that this activity was non-investment.

Caravan storage. There is an area for storage of touring caravans when not in use. Agreements for storage were for fixed periods of six months or a year and related to a specific plot. At the time of the deceased’s death there were 443 caravans stored there. The Commissioner found that this business was investment (principally because of the long-term nature of the agreements, and the limited support services required from the Company).

The administration office. Although listed as a separate “activity”, the office was used, as one would expect, for employees in connection with the various parts of the business. The Commissioner made findings as to the allocation of their time.

Warehouse and shop. These were let separately, and the rent was treated by the Commissioner as investment income.

Fields. These were let on grazing licences to a farmer, and again the receipts were treated as investment income.

Insurance. The Company had an insurance agency and received commission on insurance sold to residents and owners of caravans stored on the site. This was held to be non-investment income.

Interest. The Company also received interest on cash balances. Since the cash arose from all the Company’s activities, and “obtaining interest is not a business in itself”, this also was held to be non-investment income.

It is apparent from this description that the division into eight “activities” is somewhat artificial. Indeed, when the Commissioner came to his conclusions, he adopted a slightly different division (derived, it seems, from the evidence of the Company’s accountant, Mr Loochin):

The residential homes park – the main area of dispute (see below).

Gas, electricity and water – also disputed (see below).

Caravan sales and commissions – non-investment.

Caravan storage – investment (see above).

The club – non-investment (see above).

Other income - letting of the warehouse and grazing (investment); insurance commissions (non-investment); and interest on cash holdings (non-investment).

Looking at the matter more generally, the main components of the business were, as I have said, the residential caravan park (with the associated services, and caravan sales), the club, and the caravan storage. In deciding on the nature of the business “in the round”, it is realistic to concentrate on these elements. Indeed, it is possible to narrow the area of dispute still further. On the one hand, it is common ground that the club was properly treated as non-investment. On the other, it is difficult to see any basis for challenging the Commissioner’s conclusion that the caravan storage part of the business, looked at on its own, was investment. Mr Herbert did not concede the point, but realistically did not press it very strongly, no doubt recognising the obstacle of Edwards v Bairstow, which was very important to his own argument on other issues.

Accordingly, in the way the case was presented, it was the treatment of the residential homes park (including its utility services) which became the central issue.

The services provided for the residential homes park were described as follows, on the basis of a summary of Mrs Purcell’s evidence:

That summary does not fully explain the different ways in which the various services were supplied to the homes and paid for. More detail was given in Mrs Purcell’s written evidence:

Calor Gas could be obtained by residents, either in the form of bottles supplied for payment from a secure compound on the premises; or from mini-tanks hired individually, and installed by the Company for a fee. The tank hire fee was “collected with the site fees”.

Electricity was supplied from the company’s own powerhouse on site, maintained under a contract with Eastern Electricity, for which a single charge was paid. Supplies from the powerhouse to individual homes were metered and invoiced separately.

Water supplies to individual homes were not metered separately, but subject to a weekly fixed charge, which was “part of the site fee”.

The residential caravan park was operated under a site licence granted in 1981, under the Caravan Sites and Control of Development Act 1960. It laid down detailed conditions covering such things as density, maintenance of roads and footpaths, water supply, drainage and electrical installations. Each plot was held under an agreement in standard form, complying with the Mobile Homes Act 1983. The occupier was given the right to station and occupy a mobile home on a particular plot (subject to the owner’s right to move it for essential works); and to have the right to use communal and recreational facilities for family and guests. The licence fee was subject to annual review, having regard to the Retail Price Index, and other relevant factors, including “sums expended by the owner for the benefit of the occupiers of mobile homes on the park”.

The Commissioner described the staff engaged in the various activities:-

As to the income generated by the different activities, he gave the following breakdown based on figures provided by the Company’s accountant:-

The Commissioner also gave in each column a figure for “overheads” (excluding directors’ fees), used in arriving at the figure for gross profits. I need mention only the figure for overheads in the “site fees” column: £169,344. Later in his decision (para 25) the Commissioner gave a detailed breakdown of this figure, and noted that it represented 72% of the site fees. He commented: “the level of expenses points to a non-investment type business”.

I shall consider, first, the arguments of the parties, and the Commissioner’s conclusion, relating to the main contentious item (the residential site); and then his overall conclusions.

The taxpayers’ case was that the only investment elements were the grant of the rights to station mobile homes on particular plots (including access rights), and the physical connections to services. Everything else provided by the company was non-investment. That included, not only the services which produced a profit in their own right (such as supply of gas and electricity); but all the activities involved in running the site, including maintenance of the common parts, lighting, grass-cutting, refuse-removal and so on.

To demonstrate the split, Mr Loochin assumed that the investment element of the site-fee could be equated with the equivalent site-fee for caravan storage in the other part of the business. On that basis, he calculated, 69% of the site-fee was for “services” or non-investment, and 31% for investment (Decision para 18).

The Revenue’s case before the Commissioner can be summarised as follows:

Investment activity included, not only holding land to produce a return, but also “activities of maintenance and management which are required by the lease or are incidental to the letting” (Weston v IRC see above). The question in each case was: whether the business is fairly described as one of letting with ancillary activities, or as a business consisting of the provision of services or other trading activities, with the ancillary use or occupation of the land?

If there is a business of letting land, activities which arise from compliance with the landlord’s covenants under the relevant lease or licence, or which are incidental to the letting, will not alter the nature of the business from one of holding investments.

Anything done in complying with the site licence is part of the business of exploiting its ownership of the caravan site, and therefore part of the business of making or holding investments.

On that basis, in the Revenue’s submission, all the activities connected with the residential park were to be regarded as investment, including the provision of electricity and water. The only non-investment items in this part of the business, as I understand the Revenue’s case, were the sales of caravans and of calor gas (the latter because residents were free to buy supplies from other sources).

The Commissioner rejected this part of the Revenue’s case. He did not agree that everything done pursuant to the site licence, or the site agreement, must be part of the investment business. He said:

He concluded on this part of the case:

Finally, after giving his view on each of the components, the Commissioner expressed his overall view (under the heading “The main business of the Company”):

Before leaving the Commissioner’s decision, I should comment briefly on the way the figures relied on in the last paragraph were arrived at, and their significance.

Following the hearing before us, the parties helpfully agreed a note explaining the derivation of the 14% figure. Starting from the figures for turnover in the table set above, it is based on treating as “investment” the figures for storage (£81,732), and for the letting of the warehouse and the grazing (£9,369, being part of the “other income” figure of £17,331). The resulting total for investment (£91,101) is 14.37% of the total business turnover (£633,780). It will be seen therefore that, having found that the residential park was to be treated as “non-investment”, he excluded the whole of the turnover for that part of the business from the final calculation.

Although the compartmentalised approach adopted by the Commissioner appears to have been dictated by the way the matter was presented to him, I have some doubt whether it was necessary or realistic to dissect the business in that way. It is accepted, as I understand it, that it was a single business. It included the holding of land as investment, both for the residential park and for the caravan storage. The ultimate issue was the relative importance of other non-investment activities to the business as a whole, not their relative importance to the individual parts of the business looked at separately. Furthermore, if that is the right approach, it would not be right, in my view, to treat the residential park as purely “non-investment”. On any view, it seems, at least some 30% of the site fee was attributable to investment (Decision para 18, 31 above).

However, the Revenue has sensibly not taken detailed objections of this kind. Such points serve to underline the fact that, as the authorities recognise, trading figures are no more than an imperfect guide to one part of the overall picture. Even if the final calculation were adjusted by assuming a substantial “investment” contribution from the Residential Park, it would be very unlikely to be sufficient to affect the final balance. Nor would it undermine the Commissioner’s overall conclusion, based on looking at the matter “in the round”.

Laddie J started from the three questions derived from Weston v IRC (see above). He separated the third question into two parts: first, assuming there to be an investment business, what is its scope; secondly, how does it compare with the non-investment activities? He referred to the passages cited above from Martin v IRC, which he regarded as consistent with the approach of the House of Lords, in the context of different tax legislation, in Governors of Rotunda Hospital v Coman (1920) 7 TC 517. He said:-

Laddie J accepted Mr McKay’s submission as to the error of approach made by Dr Avery Jones which he summarised as follows:

In this Court, Mr McKay for the Revenue in fact puts his case somewhat differently from the basis on which the Judge decided in his favour. He adopts the three-stage approach suggested by Lawrence Collins J in Weston v IRC (above, at p175). However, as I have said the real area of dispute relates to the third question. On that, Mr McKay raises in substance two issues of law:-

What activities are to be regarded as “ancillary” to the holding of property as such, and therefore as parts of the investment activity?

Does it make any difference whether those activities are requirements either of (a) the agreements for the individual plots or (b) the site licence?

On the first, he submits that the Commissioner wrongly based his conclusions on a quantitative assessment of the levels of the various activities making up the business rather than -

As to the second, he says that both the Commissioner and the Judge were wrong not to attach any importance to the terms of the agreement and the site-licence. Indeed, on this point he disagrees with the Judge. The issue is not what the “average businessman” would think; but whether the services were provided pursuant to the terms of the lease or licence, and whether or not for an additional charge.

For the reasons already given, I am unable to accept Mr McKay’s reliance on the terms of the lease or licence as definitive in the case of a caravan park. On the other hand, I think, with respect to the Judge, that he placed too much reliance on the particular formulations used in Cook and Weston, instead of concentrating on the language of the statute. As I have said, the most important point about each of those decisions is that the Court was upholding the decision of the fact-finding tribunal.

In the present case the Judge was being asked by the Revenue to find some error of law in the approach of the Commissioner. The error identified by Mr McKay, as accepted by the Judge (para 15, cited above) was, in Mr McKay’s words, that instead of following the sequence based on Weston, he “jumped straight to Cook v Medway”. As I understand it, the Judge intended that as another way of putting his point that the first step was to decide what activities were in “the investment bag”; or, in Mr McKay’s terms “recognising that the land was held as an investment”, and then assessing which of the other activities were “incidental to the investment business”.

For the reasons I have given, I think that was the wrong approach. The section does not require the opening of an investment “bag”, into which are placed all the activities linked to the caravan park, including even the supply of water, electricity, and gas, simply on the basis that they are “ancillary” to that investment business. Nor is it necessary to determine whether or not investment is “the very business” of the Company. The statutory language does not require such a definitive categorisation. In the present context, it gives insufficient weight to the hybrid nature of a caravan site business, as I have explained. The holding of property as investment was only one component of the business, and on the findings of the Commissioner it was not the main component. In my view, the Commissioner’s overall approach was correct in law, and he reached a view which was open to him on the facts.

I would add that I am happy to be able to arrive at this conclusion. I find it difficult to see any reason why an active family business of this kind should be excluded from business property relief, merely because a necessary component of its profit-making activity is the use of land.

For these reasons, I would allow the appeal, and restore the decision of the Special Commissioner.

I agree. This was essentially a question of fact for the Special Commissioner who asked himself the questions which the statute requires him to ask. It is usually unfortunate to try to gloss clear statutory language with additional judicial tests. The Special Commissioners are the experts here, and appeal to the High Court is on a point of law only. The Court should resist any attempt to dress up a question of fact as if it involved a question of law.