Business Property Relief - HMRC Wins Holiday Let Appeal

At the end of 2011, taxpayers and their advisers had cause to celebrate. To the surprise of some experts working in the field, a tax tribunal ruled that 100% Business Property Relief (BPR) applied to a cottage that formed part of a person's estates which had been used for holiday lets. This meant that no inheritance tax was payable on the cottage. Unfortunately, however, the victory was short-lived. A higher tribunal has now allowed HMRC's appeal, ruling that the cottage was not covered by BPR.

Some Background

The basic principles are as follows:
. On a person's death, inheritance tax is charged on his or her estate at the rate of 40% in so far as the estate exceeds £325,000. Between them, a married couple or civil partners can leave £650,000 free of inheritance tax.
. BPR is available for business assets. These include the business assets of a sole trader, an interest in a partnership and shares in certain kinds of company. Depending on the type of asset, BPR may be as much as 100%.
. However, BPR is not available for a business or company engaged wholly or mainly making or holding investments. The line between "proper" business assets and investments is notoriously difficult to draw.

The Pawson Case

Mrs Pawson owned and let a cottage to holiday makers. When she died, HMRC ruled that the cottage was not covered by BPR. Mrs Pawson's executors appealed to the First-Tier Tribunal. There were two issues. First, was there a business? The Tribunal ruled that there was. The letting of the cottage had been a serious undertaking, there had been a reasonable continuity in the operation, the activity had had a measure of substance (judged by its profitability). Secondly, the Tribunal had to consider whether the business was merely one of holding an investment. It ruled that it was not, basing its ruling on the level of services Mrs Pawson had provided. Amongst other things, these included the cleaning of premises before each letting, the and supplying and change) of clean bed linen and the provision of utilities (e.g. gas and electricity) and ensuring that the hot water was turned on before visitors arrived.

On its appeal to the Upper Tribunal, HMRC no longer disputed that there was a business but it still maintained that the business merely consisted of holding an investment. The Upper Tribunal upheld the appeal, ruling that the First-Tier Had reached a conclusion had not been entitled to reach. In its view, the services provided had all been of a relatively standard nature, aimed at maximising the income which the family could obtain from the short term holiday letting of the cottage. There was nothing to distinguish it from any other actively managed letting business of a holiday property. In the Tribunal's view, the business was mainly of an investment nature.

It was recently announced that Mrs Pawson's executors has established a fighting fund to fund a further appeal to the Court of Appeal. Meanwhile, the Upper Tribunal's decision will come as a disappointment to many taxpayers and their advisers. The services which Mrs Pawson had provided were of a fairly extensive nature. The case certainly appears to strengthen HMRC's hand in denying BPR in similar situations. Looking at the wider context, the Coalition Government recently announced that the inheritance tax nil rate band - already frozen at £325,000 until 2015 - will remain frozen at that level until 2019 in order to fund the planned changes to social care funding. Inheritance tax looks set to become an issue for an increasing number of families. We will probably see more arguments between HMRC and taxpayers over the availability of BPR.

To find out more about inheritance tax and Business Property Relief, please contact Esther Marchant.

Filed: 05/03/2013 11:09:18