In this case, the Upper Tribunal (UT) was asked to consider whether business property relief was available for a holiday letting business and more generally whether the business consisted “mainly” of holding an investment. The UT was also asked whether the First Tier Tribunal (FTT) had erred in law by concluding that it did so consist.

Background

The case concerned a property known as “Fairhaven”, a large bungalow overlooking the sea on the Suffolk coast. At the date of her death on 20 June 2006 Mrs Pawson, the deceased, owned a 25% beneficial interest in the property, the remaining 75% was owned equally by her three children.

Mrs Pawson's share in the property formed part of her estate for inheritance tax (“IHT”) purposes, and in due course her executors claimed that it qualified for 100% relief as “relevant business property” within the meaning of Chapter 1 of Part V of the Inheritance Tax Act 1984 (“IHTA 1984”), as amended (sections 103 to 114).

The basis of the claim, briefly stated, was that Fairhaven had been used for the two years preceding Mrs Pawson's death for the purposes of a holiday letting business carried on for gain, with the result that her share in the property consisted of “a business or interest in a business” within section 105(1)(a) IHTA 1984.

The claim further stated that her share was not disqualified from being relevant business property by section 105(3), which provides that:

“A business or interest in a business are not relevant business property if the business consists wholly or mainly of making or holding investments.”

The claim was debated in correspondence but was ultimately rejected by HMRC, who issued a notice of determination on 1 October 2008 saying that “none of the value transferred in respect of the deceased's share in “Fairhaven” was attributable to the value of relevant business property”. The determination was also reviewed by a senior officer of HMRC's Trusts and Estates office who stated that HMRC would seek to argue that there was no qualifying business at all. In addition, it was HMRC's argument that the business (if there was one) was mainly a business of holding investments.

The executor's appeal against the notice of determination was heard by the Tax Chamber of the FTT who allowed the appeal, finding that the exploitation of Fairhaven by the Pawson family in the two years before Mrs Pawson's death had constituted the operation of a business with a view to gain, and that the business was not one which consisted wholly or mainly of the holding of an investment.

After the FTT decision, HMRC abandoned their challenge that the holiday letting business of the property was not carried on for gain. Therefore before the UT it was common ground that Mrs Pawson's share in the property was relevant business property, and entitled to relief accordingly at the rate of 100%, unless it was disqualified by section 105(3) on the ground that the business was “mainly” one of holding the property as an investment.

In relation to the “investment” issue, the FTT reviewed the law in paragraphs 16 to 21 of their decision, citing extensively from leading English authority on the subject. The FTT had also referred (in paragraph 17 of the decision) to the leading judgment in McCall v Revenue & Customs Commissioners [2009] NICA 12, [2009] STC 990 as authority for two propositions.

The first proposition (derived from paragraph 11 of Girvan LJ's judgment), was that the statutory test of holding an investment is not a term of art, and “it should be given the meaning that would be given by an intelligent businessman and just because the person holding it has to take active steps that does not prevent it being an investment”.

The second proposition (derived from paragraph 14 of Girvan LJ's judgment), was that “where a landowner derives income from land he will be treated as having a business of holding an investment notwithstanding that in order to obtain the income he carries out incidental maintenance and management work, finds tenants and grants leases.”

The core of the FTT decision was that on the facts of the case there were clearly significant services provided to the occupiers of the property and that those services were a significant part of the reason why the occupiers were prepared to pay what they did pay for the package of benefits they received when booking to use the property as a holiday destination.

The fact that the appellants could provide those services at a relatively low cost to themselves compared with the amount they could charge for the package was deemed by the FTT to be irrelevant.

In short, the FTT took the view that the services provided by the Pawson's to holidaymakers who rented the property went well beyond those which an intelligent businessman would regard as falling on the investment side of the line. Although not explicitly outlined, the FTT appear to have considered that the non-investment services were of such a nature and extent that the business was not even “mainly” one of holding Fairhaven as an investment.

HMRC was granted leave to appeal on the basis that there was an arguable point of law.

Decision

The UT allowed HMRC's appeal stating that the investment business exception in IHTA 1984, s. 105(3) involved an all or nothing test: either the property in question was relevant business property, and qualified for relief in full, or it was not.

In George (Executors of Stedman, dec'd) v IR Commrs [2003] a general proposition was endorsed that property management formed part of the business of holding property as an investment, including maintenance of the property and the activity of finding tenants and arranging leases or licences. Where the business was one of letting a building, the provision of additional services or facilities to the occupants would not usually be enough to prevent the business remaining ‘mainly’ one of holding the property as an investment.

In this case, the starting point was that the owning and holding of land in order to obtain an income from it was generally to be characterised as an investment activity. Further, such an investment could still be actively managed without losing its essential character as an investment; various cases were cited in support of this.

Accordingly, the fact that the co-owners had carried on an active business of letting the property to holidaymakers did not detract from the point that, to that extent at least, the business was basically one of an investment nature.

It was clear from the decision in George that the provision of additional services and facilities to holidaymakers was not to be regarded as part of the maintenance of the property as an investment, and that their characterisation as services was unaffected by the fact that no separate charge was made for them.

However, the critical question was whether those services were of such a nature and extent that they prevented the business from being mainly one of holding the property as an investment. The implication from the judgment in George was that, in any normal case, an actively managed property letting business would fall within the exception in s. 105(3) because the ‘mainly’ condition would still be satisfied.

The services provided were all of a relatively standard nature, aimed at maximising the income which the family could obtain from the short term holiday letting of the property. Looking at the business overall, there was nothing to distinguish it from any other actively managed furnished letting business of a holiday property. It was held that there was certainly no basis for concluding that the services comprised in the total package were to such an extent that the business ceased to be one which was mainly of an investment nature.

The FTT had misdirected itself and should have concluded that the property was held mainly as an investment. HMRC's refusal of business property relief was reinstated.

The full text of the case is available at http://www.tribunals.gov.uk/financeandtax/Documents/decisions/HMRC
_v_1_Lockyer_2_Robertson_for_Nicolette_Pawson.pdf