Inheritance Tax Relief and Furnished Holiday Lets

There has been much speculation about what would happen when a tax Tribunal was faced with the question of whether business property relief (BPR) for IHT purposes could be achieved on a furnished holiday let (FHL) property.  This Tribunal case has now taken place.  The Tribunal in Mrs N V Pawson’s Personal Representative v HMRC ([2012] UKFTT 51) allowed a BPR claim on a FHL cottage.  This judgement has helped provide useful guidance on the business nature of the ownership and management of a holiday letting property with regard to the possibility of claiming BPR.  It is understood that HMRC will appeal against this decision, particularly as there are apparently a number of similar cases awaiting a verdict.  What are the facts of the case?

The holiday let property, located in Thorpeness Suffolk, was let fully furnished as a holiday home and jointly owned by the deceased and members of her family.  The deceased held a 25% share in the FHL property.  

The tax Tribunal accepted that the property had been run as a business for more than the two years before the deceased’s death.  The Tribunal also accepted the fact that the family’s use of the property for three weeks a year did not prevent it from being run as a holiday let.  The use of the property by family members reduced the level of activity and profit but it was considered not enough to prevent the property being run on sound business principles.  The business had been profitable for two of the three years before the taxpayer died, and was running profitably in the year of her death.  The Tribunal concluded that the business was being run with a view to gain which satisfied the relevant IHT legislation (IHTA 1984, s 103(3)), as a business carried on otherwise than for gain is not to be regarded as a “business”.  

Three tax case authorities were cited for consideration by the tax Tribunal as to whether there was a business – “Lord Fisher”, “Morrison’s Academy” and McCall v IRC ([2009] STC 990).  The six “indicia of business” were then considered.  Certain principles were raised in McCall where it was decided that a landowner who derives income from property will be treated as having a business of holding an investment, as opposed to a trading business.  Such receipt of income is notwithstanding that in order to obtain the income the landowner carries out incidental maintenance and management work, finds tenants and grants leases.  In Mrs Pawson’s case it was decided that the FHL was a business asset providing a service.  The generic profit motive (as opposed to some other purpose or motive) is of key importance to help justify the BPR claim.  The tax Tribunal confirmed the business was “a property consisting of a business or interest in a business” carried on for gain (IHTA 1984, s 105(1)(a)).

The six “indicia of business” are, in summary, that the courts would expect a genuine business to be:

a) a serious undertaking, earnestly pursued;

b) actively pursued with reasonable continuity;

c) with a reasonably substantial level of sales;

d) conducted on sound business principles;

e) predominantly making supplies to customers for consideration; and 

f) of a type that one would commonly expect to profit from.

When considering a future claim for BPR on an FHL, the six indicia should be reviewed and protection put in place where possible.

The tax Tribunal had to consider if the business consisted wholly or mainly of the holding of an investment.  Taking into account the decision in another case (George (Stedman’s Executors) v CIR [2004] STC 163), the Tribunal concluded that ”an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading”.  The Tribunal agreed that having to find new occupants and provide the relevant services were not the equivalent of owning a property as an investment.  The property was a business asset being used to provide a service.  The taxpayer’s appeal for the claim for BPR on the FHL was allowed by the Tribunal.

Many had considered that BPR could not be achieved on a single FHL property as they thought that there had to be a number of properties for there to be a business, but thePawson case has provided greater hope for the genuine well run FHL business to achieve IHT relief.  It is worth quoting from the judgement: “The operation of the property as a holiday cottage for letting to holidaymakers was a serious undertaking earnestly pursued…the principles on which the activity is run are regular and sound.”  This case showed that there did not have to be a number of FHLs in order to achieve BPR and that a single property can still be a business – it does not have to be a property empire.

The indicia of business can be applied to one property.  The question is: has the “BPR bar been lowered” by allowing BPR on one property?  The level of service is the key factor for achieving BPR.

Let commercial property with a high degree of service provided to tenants

Can the principle of BPR being achieved on an FHL with a high degree of service be extended to a let commercial property with a similar degree of services being provided by the property owner to a large range of tenants?  For example, there may be a large number of tenants in a commercial property requiring a large amount of service.  Will a tax Tribunal decide that the complexity of the serviced let commercial property is “far too active an operation” to be an investment?  Can the six indicia of business be proved?

Is this a trading business as opposed to ownership of an investment property?  Would an intelligent businessman see this as too active an operation for an investment?  Is there more than incidental maintenance work of owning a commercial property?  Are the six indicia of business in place?

Whatever the answers to these questions, there is hope for the claim for BPR on an FHL.  There are clear protective actions the owners of FHLs can put in place while we await the outcome of the HMRC appeal of the Pawson case.

The practical steps to be taken going forward in order to try and protect future BPR claims on FHL property are to ensure that the operation is profitable, the private use is minimal and there is clear evidence of the provision of relevant services for the holidaymakers available.  Perhaps the case has provided “confused hope” but aiming to meet the criteria discussed can only be positive as the news of an appeal is awaited.  What will an “intelligent businessman” decide next time he considers the question of BPR on an FHL or even a let commercial property with a high degree of service?  Is that the holding of an investment or a trade?