In HMRC v Nicolette Vivian Pawson (Deceased) [2013] UKUT 050 (TCC) the Upper Tier Tax Tribunal (UTT) decided that a furnished holiday letting business did not qualify for IHT Business Property Relief (BPR).
The UTT decided that the activities undertaken in conjunction with running the property business were typical of the type undertaken by an investment business. In doing so it concluded that the First Tier Tribunal (FTT) must have misunderstood guidance found in case law.
The activities were:
- that the owner to constantly find new tenants, and
- the provision of services over and above those needed for the bare upkeep of the property
as a result even though the business qualified for income tax as furnished holiday letting it was an investment business and did not qualify for BPR.
The law
In order for a furnished holiday letting to qualify as relevant business property for BPR:
- There must be a business carried on.
- It must be carried on for a gain.
and it must not be a business consisting wholly or mainly of “holding investments” (section 105 IHTA 1984). Holding a property for rental is regarded as holding an investment, therefore there is a requirement for there to be business activities undertaken of such a scale to show that the business is not an investment business.
In deciding what type of business activities in relation to property holiday rental are "wholly or mainly" investment activities, past cases have often focused on caravan parks - notably the Court of Appeal in HMRC v George & Loochin (Stedman’s Executors)[2004] STC147.
Case law establishes the principle of looking at the activities undertaken in the round. A property landlord typically undertakes three types of activity:
- That which he is obliged to perform under the terms of the lease – investment activities.
- That carried on for gain, and not required by the lease – non-investment activities.
- Those not carried on under the terms of the lease but which are incidental to holding property for which no separate consideration will fall – investment activities.
HMRC changed its guidance on the availability of BPR for the activity of Furnished Holiday Letting a few years ago. Before that it agreed that BPR would be available. BPR will continue to be allowable where businesses are not wholly or mainly active in investment activities, see Furnished Holiday Letting for a list of suggested services that are non-investment activities.
The earlier FTT decision
In the FTT hearing - Nicolette Vivian Pawson (Deceased) v HMRC [2012] UKFTT TC01748 the findings were that:
- The activity of Furnished Holiday Letting amounted to a business.
- The operation was profitable
- Significant services were provided to customers as a package in addition to the holiday property: cleaning, laundry, TV, light and heat.
In considering whether the activities undertaken were those of a landlord activities, in order to tests whether this was a business of wholly or mainly holding investments:
- There was no lease and it is not right to try and equate a holiday letting contract with a lease.
- Ancillary services were provided as part of the whole package.
- Some services were provided that were no specifically carried out under the holiday letting contract, but these were not incidental to holding the property as an investment.
The Tribunal had “no doubt that an intelligent business man would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading.” This decicion has now been overruled.
HMRC operates a non-statutory clearance procedure: furnished holiday let owners may use this to agree whether BPR is due on their business.
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