Inheritance Tax business property relief on Holiday Lettings: Pawson V Inland Revenue Commissioners
The recent First Tier Tribunal decision in Pawson v Inland Revenue Commissioners granted inheritance tax business property relief to an interest in a property used for holiday lettings.
The personal representatives of Nicolette Pawson, who died 20 June 2006, appealed against a determination that Mrs Pawson’s 25% share in a property on the Suffolk coast was subject to inheritance tax.
The decision in this case is a fascinating outcome with a victory for the tax payer, giving rise to much needed clarification on the taxation of holiday lettings and raising concerns about the conduct of the Revenue.
Holiday lettings: investment business or trading business?
The case revolved around whether or not the letting of a holiday cottage consisted wholly or mainly of holding an investment. Property consisting of a business or an interest in a business carried on for gain and consisting of something other than the making or holding of investments (‘relevant business property’) is entitled to relief from inheritance tax.
The property in question was a large bungalow overlooking the sea on the Suffolk Heritage Coast at Thorpeness, Suffolk. The property could accommodate up to eleven people and was typically let for less than two weeks at a time. HMRC had determined in 2008 that the property was subject to inheritance tax. The taxpayer appealed to the Tax Chamber of the First-Tier Tribunal, claiming that the property was entitled to relief as a ‘relevant business property’.
Although it was occupied by family members for three weeks during the holiday season, a great deal of evidence was given about the operation of the property as a holiday cottage, namely:
The property was fully furnished and the kitchen fully equipped
It was inspected regularly, cleaned between each letting and the garden attended to
Supplies such as cleaning materials were replenished on a regular basis
Hot water and heating were turned on before visitors arrived
Television and telephone were available
The Tribunal allowed the appeal on the facts of the case, finding that the additional services were ‘unconnected with and over and above those needed for the bare upkeep of the property as a property’. They were not merely incidental to the holding of the property as an investment. Together with the need constantly to find new occupants, the Tribunal concluded that such a business involved far too much work to be considered an investment business.
The case sets down some useful markers for owners of holiday cottages hoping to attract relief from inheritance tax. Provided the holiday business is carried out for gain and conducted in a businesslike way, relief should be available where:
1) Services are provided that are unconnected with and over and above those needed for the bare upkeep of the property as an investment – for example, clean bedclothes, hot water, heating, television, telephone, furnishings, regular cleaning and replenishment of supplies.
2) The operation involves a level of activity that goes above and beyond that required for the management of an investment – for example, actively advertising for holiday lettings and finding new occupants.
HMRC conduct against the taxpayer
The conduct of the Revenue was severely criticised by the Tribunal. The commissioners were late in serving their skeleton argument and attempted to exclude evidence from the appellant on what the Tribunal considered ‘ill conceived grounds giving little if any justification for complaint and causing them no difficulty whatsoever in presenting their case’. This was all the more unsatisfactory in light of the fact that other cases had been stood over pending the result in this case: rather than allowing the Tribunal to reach its decision on a full consideration of the actual facts, the commissioners had hoped to secure a decision – which they would seek to rely upon in other cases – on an artificially restricted basis.
This was highly comparable to our experience of the Revenue’s conduct in ‘Golding -v-HMRC’, a seminal case in which Clive Beer of Savills acted as expert witness for the tax payer. Whilst the Revenue had in open correspondence agreed the basis of their refusal for relief, on the eve of the Hearing they sought to argue a second ground. The Tribunal did not allow the Revenue to take this point and ultimately found in favour of the taxpayer, but the Revenue’s tactics in attempting to secure a decision with such far-reaching implications are a cause for concern.
The above article appeared in a report by Savills.