Furnished Holiday Letting: Pawson case

In HMRC v Nicolette Vivian Pawson (Deceased)  [2013] UKUT 050 (TCC) the Upper Tribunal (UT) decided that a furnished holiday letting (FHL) business did not qualify for IHT Business Property Relief (BPR). All is not lost for FHL owners, more actively run businesses should still qualify for relief.

In summary: in Pawson the UTT decided that the scale of the activities undertaken in conjunction with running the property business were more typical of the type undertaken by an investment business. In doing so it decided that the First Tier Tribunal (FTT) who had earlier decided in favour of the taxpayer must have misunderstood guidance found in case law.

The activities were:

• that the owner to 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 at that time, it was an investment business and did not qualify for BPR.

The taxpayer was denied leave to appeal this decision to the Court of Appeal. With all due respect to the taxpayer this was because it was not an ideal case to appeal. In Pawson, very little holiday letting was done and the services performed were minimal. In terms of the modern FHL qualifying conditions the business would have probably not qualified under the new rules at the time. Many advisers will wish that the case had stopped at the First Tier Tribunal. We presume now that HMRC will be strongly resisting claims for BPR in cases where the FHL business consists of a single property.

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 ordinary 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 and estates and so are unhelpful for FHL owners.

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.

So, what activities are non-investment activities?

Our guidance in Furnished Holiday Letting provides a full breakdown of activities. Despite Pawson we consider that there will be many cases where BPR will still apply.

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. It is unlikely following Pawson that HMRC will be allowing BPR, but time will tell.

Top tips and planning points

Furnished Holiday Letting
Our guide for subscribers to this website. This is an essential guide for anyone furnished holiday letting or advising on the topic. It contains a detailed analysis of the old and new rules, with sections on repairs, fixtures, income tax, capital gains tax, inheritance tax, VAT and capital allowances.