You may recall reading about the case of Pawson (Dec’d) v HMRC, in which the Executors of the deceased’s estate claimed 100% Business Property Relief (BPR) against inheritance tax in respect of Mrs Pawson’s 25% stake in a holiday letting cottage.
HMRC denied the claim on the grounds that Mrs Pawson was not running a business but was simply holding an investment and therefore BPR was not available.
The case went to the First Tier Tribunal (FTT) who ruled in favour of the taxpayer, stating that Mrs Pawson’s interest in the cottage was a business. In their opinion, the ownership of the property involved ‘far too active an operation’ for it to be regarded as an investment (the owners provided services including changing bed linen, utilities and a gardener).
The decision was based around the idea that a ‘reasonably intelligent person’ would consider the letting of the cottage to be a business not an investment. This was because the letting of a holiday cottage involved far more time and input from the owners than the normal letting of property and land.
HMRC appealed against this decision and the case went in front of the Upper Tier Tribunal (UTT) on 18 December 2012. The UTT ruling was released this week.
HMRC based their argument on the basis that the services provided were merely incidental to the actual ownership of the property and as such did not constitute a business.
In contrast, the representatives of Mrs Pawson argued that the nature of the test should be qualitative and not quantitative.
Unfortunately, the UTT ruled in favour of HMRC stating that obtaining income from land is generally regarded as investment activity. The existence of active management of a property does not mean that the property loses its investment status. In addition, the UTT concluded that a large part of the ‘services’ provided were actually inherent with investment activity (such as collecting rents, finding occupants, maintaining and up-keeping the garden and house). The additional services of changing bed linen, providing utilities and cleaning services, were business activities but were not sufficient to allow them to prevent the overall ownership of the cottage as being an investment.
At present we do not know if the Executors of Mrs Pawson Dec’d will appeal against this decision. It is however a very important case and we will need to consider how this decision will impact on those who hold Furnished Holiday Lets.
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