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Contributed by ACCA

Upper Tier Tribunal rules on inheritance tax business property relief.

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 de minimis 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 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.

For many years, short-term holiday letting was treated as similar to a trade, so this decision has disappointed many in the profession, who will now need to review and reconsider their position. They may also be interested to know that a ‘fighting fund’ has been launched to take the case to the courts.

You can find links to the case and HMRC manuals on ACCA’s Technical Advisory website.