Inheritance tax – Business property relief – Holiday letting – Section 105(3) of the Inheritance Tax Act 1984 – Deceased having share in property used as holiday let for profit – Revenue and Customs Commissioners refusing executors’ claim for business property relief on death – First-tier Tribunal finding that relief available as business not consisting mainly of holding investment – Whether tribunal erring in law – Appeal allowed
The deceased owned a 25% beneficial interest in a seaside bungalow. The remaining 75% was owned equally by her three children, the respondent executors and their brother. The deceased’s share in the property formed part of her estate for inheritance tax (IHT) purposes, and the respondents claimed that it qualified for 100 per cent relief as ‘relevant business property’ within sections 103 to 114 of the Inheritance Tax Act 1984, as amended.
The basis of the claim was that the property had been used for the two years preceding her death for the purposes of a holiday letting business carried on for gain, so that her share in the property consisted of “a business or interest in a business” within section 105(1)(a) of the 1984 Act which was not disqualified from being relevant business property by section 105(3), which provided that a business or interest in a business was not relevant business property if the business consisted wholly or mainly of making or holding investments.
The appellant Commissioners rejected the claim and issued a notice of determination on the ground that none of the value transferred in respect of the deceased’s share in the property was attributable to the value of relevant business property. The First-tier Tribunal (FTT) allowed the respondents’ appeal against that determination, concluding that the exploitation of the property in the two years before the deceased’s death had constituted the operation of a business with a view to gain, and that the business was not one which consisted wholly or mainly of the holding of an investment: [2012] UKFTT 51 (TC); [2012] TC 01748.
The appellants appealed, contending that the FTT had erred in law because it formulated and applied the wrong test in assessing whether the business consisted wholly or mainly of the holding of an investment.
Held: The appeal was allowed.
(1) The ownership and holding of land in order to obtain an income from it was generally to be characterised as an investment activity. Such an investment might be actively managed without losing its essential character as an investment. Property management formed part of the business of holding property as an investment, including maintenance of the property as an investment as well as the activity of finding tenants and arranging leases or licences. There was a distinction between such management activities and the provision of additional services or facilities to the tenants or occupants, whether they were separately charged for or included in the lease and covered by the rent. The characterisation of such services depended on the nature and purpose of the activity, and not on the terms of the lease or site licence. Where the business was one of letting a building, the provision of additional services or facilities to the occupants was unlikely to be material because they would not be enough to prevent the business remaining ‘mainly’ one of holding the property as an investment: In Commissioners of Inland Revenue v George [2003] EWCA Civ 1763 applied.
(2) The fact that the family in this case had carried on an active business of letting the property to holidaymakers did not detract from the point that, to that extent at least, the business was basically one of an investment nature. The business activities carried on in relation to the property which would naturally fall on the investment side of the line included the taking of active steps to find occupants, making the necessary arrangements with them, collecting payment of the rent, the incurring of expenditure on repairs, redecoration and improvement of the property, maintenance of the garden and grounds in a tidy condition, and keeping the property insured. All of those activities were directed at maintaining or enhancing the capital value of the property, and obtaining a regular income from its letting. Furthermore, the additional services provided to occupants, which consisted of the provision of the services of a cleaner/caretaker, who cleaned the property between each letting and carried out regular inspections of the property, the provision of space heating and hot water, television and telephone at the property, being on call to deal with queries and emergencies and the replenishment of cleaning materials as and when necessary, and the provision of an up-to-date welcome pack were not of such a nature and extent that they prevented the business from being “mainly” one of holding the property as an investment within the exception in s. 105(3).
(3) On the basis of its findings of primary fact, the only conclusion which was reasonably open to the FTT to draw was that the business carried on at the property remained one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, aimed at maximising the income which the family could obtain from the short term holiday letting of the property. Looking at the business in the round, there was nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature.
Dr Christopher McNall (instructed by the Solicitor to HMRC) appeared for the appellants; Keith Gordon and Ximena Montes Manzano (instructed by Pawson & Co) appeared for the respondents.
Eileen O’Grady, barrister
HM Commissioners of Revenue and Customs v Lockyer and another (as personal representatives of Pawson, deceased)
Inheritance tax – Business property relief – Holiday letting – Section 105(3) of the Inheritance Tax Act 1984 – Deceased having share in property used as holiday let for profit – Revenue and Customs Commissioners refusing executors’ claim for business property relief on death – First-tier Tribunal finding that relief available as business not consisting mainly of holding investment – Whether tribunal erring in law – Appeal allowedThe deceased owned a 25% beneficial interest in a seaside bungalow. The remaining 75% was owned equally by her three children, the respondent executors and their brother. The deceased’s share in the property formed part of her estate for inheritance tax (IHT) purposes, and the respondents claimed that it qualified for 100 per cent relief as ‘relevant business property’ within sections 103 to 114 of the Inheritance Tax Act 1984, as amended. The basis of the claim was that the property had been used for the two years preceding her death for the purposes of a holiday letting business carried on for gain, so that her share in the property consisted of “a business or interest in a business” within section 105(1)(a) of the 1984 Act which was not disqualified from being relevant business property by section 105(3), which provided that a business or interest in a business was not relevant business property if the business consisted wholly or mainly of making or holding investments. The appellant Commissioners rejected the claim and issued a notice of determination on the ground that none of the value transferred in respect of the deceased’s share in the property was attributable to the value of relevant business property. The First-tier Tribunal (FTT) allowed the respondents’ appeal against that determination, concluding that the exploitation of the property in the two years before the deceased’s death had constituted the operation of a business with a view to gain, and that the business was not one which consisted wholly or mainly of the holding of an investment: [2012] UKFTT 51 (TC); [2012] TC 01748.The appellants appealed, contending that the FTT had erred in law because it formulated and applied the wrong test in assessing whether the business consisted wholly or mainly of the holding of an investment.Held: The appeal was allowed. (1) The ownership and holding of land in order to obtain an income from it was generally to be characterised as an investment activity. Such an investment might be actively managed without losing its essential character as an investment. Property management formed part of the business of holding property as an investment, including maintenance of the property as an investment as well as the activity of finding tenants and arranging leases or licences. There was a distinction between such management activities and the provision of additional services or facilities to the tenants or occupants, whether they were separately charged for or included in the lease and covered by the rent. The characterisation of such services depended on the nature and purpose of the activity, and not on the terms of the lease or site licence. Where the business was one of letting a building, the provision of additional services or facilities to the occupants was unlikely to be material because they would not be enough to prevent the business remaining ‘mainly’ one of holding the property as an investment: In Commissioners of Inland Revenue v George [2003] EWCA Civ 1763 applied.(2) The fact that the family in this case had carried on an active business of letting the property to holidaymakers did not detract from the point that, to that extent at least, the business was basically one of an investment nature. The business activities carried on in relation to the property which would naturally fall on the investment side of the line included the taking of active steps to find occupants, making the necessary arrangements with them, collecting payment of the rent, the incurring of expenditure on repairs, redecoration and improvement of the property, maintenance of the garden and grounds in a tidy condition, and keeping the property insured. All of those activities were directed at maintaining or enhancing the capital value of the property, and obtaining a regular income from its letting. Furthermore, the additional services provided to occupants, which consisted of the provision of the services of a cleaner/caretaker, who cleaned the property between each letting and carried out regular inspections of the property, the provision of space heating and hot water, television and telephone at the property, being on call to deal with queries and emergencies and the replenishment of cleaning materials as and when necessary, and the provision of an up-to-date welcome pack were not of such a nature and extent that they prevented the business from being “mainly” one of holding the property as an investment within the exception in s. 105(3).(3) On the basis of its findings of primary fact, the only conclusion which was reasonably open to the FTT to draw was that the business carried on at the property remained one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, aimed at maximising the income which the family could obtain from the short term holiday letting of the property. Looking at the business in the round, there was nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature. Dr Christopher McNall (instructed by the Solicitor to HMRC) appeared for the appellants; Keith Gordon and Ximena Montes Manzano (instructed by Pawson & Co) appeared for the respondents.Eileen O’Grady, barrister
