In a recent tax case, Mrs Pawson died in 2006, and part of her estate consisted of a 25% share in a holiday cottage that was let out as ‘furnished holiday accommodation’ (FHA). Her executors claimed ‘business property relief’ (BPR) on this, which would have meant that the value of the property would not have been included in her estate for inheritance tax purposes. BPR, however, is not available on a ‘business’ which consists ‘wholly or mainly’ of ‘making and holding investments’.
There is a long history of disagreement with HMRC concerning the point at which an investment business (such as owning a property portfolio) becomes a trading activity (such as owning and running a hotel). HMRC used to accept that FHA qualified for BPR, provided the owner was reasonably ‘hands on’ in their operation of the business. However, in November 2008, with the Pawson case as yet unsettled, they changed their minds and amended their Inheritance Tax manual to say that in most cases FHA would not get BPR.
The Pawson case
The First tier Tribunal heard the Pawson case in December 2011, and found strongly in favour of BPR, saying that the level of work involved in the weekly or fortnightly change of occupancy at a holiday let meant it was not reasonable to regard it as an ‘Investment’.
HMRC appealed to the Upper Tribunal, who heard the case in January 2013, and overturned the First tier Tribunal’s finding, saying that letting FHA was more of an investment than a trading activity. They regarded the services provided to the holidaymakers (cleaning, heating, a television and a phone, and someone on call for help in emergencies) as being part of the ‘investment’ business of letting the property.
There was some discussion about taking the case to the Court of Appeal, but on 2 October we heard that the executors had been refused leave to appeal, which means the decision of the Upper Tribunal is now final, and will no doubt be used by HMRC to deny BPR to all FHA. At the time of writing, HMRC have made no comment, but we may expect to see some sort of guidelines in the near future, and the likelihood is that these will set the bar very high for FHA to qualify for BPR.
Additional services
The problem is that the Pawson case was not a good one from the taxpayer’s point of view. The property on which BPR was claimed was only a 25% share of the business, and by the time of her death Mrs Pawson was not very involved in running it, though she had been in the past. The services provided to guests were the very bare minimum you would expect in a holiday cottage. Indeed, it was not until after Mrs Pawson’s death that a laundry service was introduced. During Mrs Pawson’s lifetime, guests had to bring their own linen.
This contrasts with the sort of holiday accommodation where much more is provided, such as a cafe or bar, a restaurant, a swimming pool, play areas for children, and sports facilities. Quite recently, one of my clients who provided this sort of holiday was allowed BPR, on the basis that the business was ‘mainly’ the provision of a holiday experience rather than the mere letting of property.
Unfortunately, HMRC tend to generalise, and will no doubt say that the Pawson case proves that no FHA can qualify for BPR.
Practical Tip:
If you let out FHA, you need to consider whether you provide sufficient additional services to show that the business is ‘mainly’ one of providing a holiday experience, and not ‘mainly’ the letting of property. Unless you are providing a lot more than serviced accommodation, you should assume your FHA will not qualify for BPR.
