The subject matter of this case was whether or not the deceased's 25% share in a bungalow which had been let as holiday accommodation was relevant business property.

Background

The deceased had a 25% share in a property in Suffolk let as holiday accommodation apart from three weeks each year when it was used by family. Her personal representatives claimed the property was entitled to relief as a ‘relevant business property’ for the purposes of inheritance tax, arguing that the letting of the property had been a business and that the property had not been an investment.

HMRC contended that the use of the property did not constitute a business or interest in a business within the meaning of section 105(1) IHTA 1984 since it was not carried on for gain. Even if the use to which the property had been put amounted to the operation of a business/interest in a business in principle and for gain, it was still excluded from the term ‘relevant business property’ because, under section 105(3), the business consisted wholly or mainly of holding investments.

Decision

The First-tier Tribunal (FTT) allowed the taxpayers’ appeal.

In this case the exploitation of the property amounted to the operation of a business during the years in question and the letting was a serious undertaking with reasonable continuity in the operation. The tribunal found that at no time it was not used for letting and although the main period of occupation was during the summer that was expected given the location.

Whilst the use of the property by family members for three weeks a year reduced the level of activity and the profit, that was not enough to prevent the property being run on sound business principles. Thus the activity was clearly intended to amount to making supplies to consumers.

The supplies were of a type commonly made by those seeking to profit. In fact the operation had made a profit in two of the three years before death and was running profitably in the part-year in which the deceased died. It was therefore clear that the business was being conducted with a view to gain.

In relation to the question as to whether the business constituted ‘wholly or mainly of holding investments’, it was the FTT's view that the holding of an investment was not a term of art and should be given the meaning that would be given by an intelligent businessman.

The taking of active steps did not prevent it being an investment. Where a landowner derived income from land he would be treated as having a business of holding an investment even though, in order to obtain the income, he carried out incidental maintenance and management work, found tenants and granted leases etc (the case of Weston (as Executor of the Will of Weston, dec'd) v IR Commrs [2000] BTC 8,041 was considered).

However, on the facts in this case, there were clearly significant services provided to the occupiers of the property. Those services were a significant part of the reason why the occupiers were prepared to pay for the package of benefits they received. It was not relevant that the appellants could provide those services at a relatively low cost to themselves compared with the amount they charged customers.

The activities which potentially needed to be analysed in respect of the investment issue held to be of three types:

1. Those which a landlord was required to carry out under a lease;

The FTT doubted whether a holiday let could really be equated with a landlord's obligations under a lease at all. Whilst the right of the holidaymaker to occupy the premises was under the same contract as the provision of the services that were promised (such as cleaning heating etc.), it was unrealistic to equate that with a formal lease, typically of much longer duration, and under which the services were very much secondary to the right of occupation.

2. Those carried out for gain

The second type of activity was the separate provision of services carried out for gain and that was clearly not part of the holding of an investment on any view.

3. Those which although not required by the lease were connected with and incidental to the holding of the property as an investment (cases of George (Executors of Stedman, dec'd) [2004] BTC 8,003 and Martin (Executors of Estate of Moore dec'd) v IR Commrs (1995) Sp C 2 were cited).

The third category was services which were not required to be carried out under the lease but which were provided without separate consideration. Those would only be part of an investment activity if they were connected with and incidental to the holding of the property as an investment.

In this case, some of the services provided were not specifically required to be carried out under the holiday letting contract but such services could hardly be said to be incidental to the holding of the property as in investment.

The tribunal held 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 an active operation for it to come under that heading. The constant need to find new occupants and to provide services unconnected with (and over and above those needed for the bare upkeep of the property as a property) led to the conclusion that the property was not an investment but a business asset to be exploited as part of the provision of services going well beyond an investment as such.

For the reasons stated above, the appeal was allowed.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j6122/TC01748.pdf