HMRC v Pawson

A look at a recent case involving inheritance tax

The Upper Tribunal has overturned the First-tier Tribunal’s decision in the case of HMRC v Pawson [2013] (UKUT 050 (TCC).

The decision was that inheritance tax business property relief is not available for a furnished holiday let.

The executors of Mrs Pawson deceased appealed against the contention by HMRC that the property owned by the estate and used for furnished holiday lets was not eligible for business relief for inheritance tax. 

The first appeal was to the First-tier Tribunal, who found that the operation of the holiday cottage for letting was a serious undertaking earnestly pursued. The judges stated:

Clearly there is and has been reasonable continuity in the operation. There has been no year in recent years when it was not used for letting. The annual outputs are certainly not deminimis and are an activity having a measure of substance.

They also decided that the basic principles on which the business is run are regular and sound.

The property is not being allowed to go to ruin, there are no debts and the owners are intending to achieve what they can by advertising and by keeping the property clean and up to a reasonable standard.

They added that it involved far too active an operation for it to come under the heading of investment holding and allowed the appeal.

HMRC appeal

HMRC appealed to the Upper Tribunal, which did not dispute the facts that the taxpayers had been running a business for gain, but felt that they were merely doing so to maximise their return on holding an investment.

Section 105(3) Inheritance Tax Act 1984 states:

'A business or interest in a business, or shares in or securities of a company, are not relevant business property if the business or, as the case may be, the business carried on by the company consists wholly or mainly of one or more of the following, that is to say, dealing in securities, or shares, land or buildings or making or holding investments.'

Thus the appeal by HMRC was upheld and business property relief is denied.

HMRC will continue to refer any claim for business property relief to its technical team, which follows their guidance in IHTM25278 - caravan sites and furnished lettings: holiday lettings.

It states that:

'In the past we have thought that business property relief would normally be available where:

  • the lettings were short term, and
  • the owner, either himself or through an agent such as a relative, was substantially involved with the holidaymakers in terms of their activities on and from the premises.

Recent advice from the Solicitor’s Office has caused us to reconsider our approach and it may well be that some cases that might have previously qualified should not have done so. In particular we will be looking more closely at the level and type of services, rather than who provided them.

Until further notice any case involving a claim for business property relief on a holiday let should be referred to the Technical Team (Litigation) for consideration at an early stage.'

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