The recent First Tier Tribunal decision in Pawson v HM Revenue and Customs granted inheritance tax business property relief to an interest in a property used for holiday lettings.
Whilst for income tax and capital gains tax purposes holiday lettings are treated as a trade if certain conditions about the number of days for which the property is let are satisfied, it has always been necessary for inheritance tax purposes to show that the business of holiday lettings was something more than an investment business.
When she died on 20th June 2006, Mrs Pawson owned 25% of a property which had been in the family for a number of years. It was a bungalow which could accommodate 11 people and had direct access to a beach. It was used for holiday lettings.
The Tribunal had to decide two issues:
- Whether the bungalow had been used for the operation of a business for the 2 years before Mrs Pawson died. To be regarded as a business for inheritance tax business property relief purposes the business must be carried on for gain;
- Whether the property was excluded from business property relief on the basis that the business consisted wholly or mainly of holding investments.
The income from the property was 2003-04 £4,342.99 (profit £680.27), 2004-05 £6,072.51 (profit £802.32), 2005-06 £8,120.00 (loss £2,071.61). In each of those years the family occupied the property for 3 weeks during the holiday season. They paid for the accommodation at rates calculated in accordance with HM Revenue and Customs’s literature about private use of business assets.
A cleaner and gardener were employed and a laundry service was used to provide fresh bed linen for holidaymakers. This only started after Mrs Pawson’s death.
Mrs Pawson had dealt with the business of letting herself until June 2005 when her daughter, Mrs Robertson, became involved. This resulted in a more modern approach to matters such as advertising and a family decision to improve the property with a view to attracting customers. This in turn led to expenditure on redecoration which resulted in the loss in 2005-06.
The Tribunal found that the exploitation of the bungalow amounted to the operation of a business for the 2 years before Mrs Pawson’s death. In particular, the letting of the cottage was a serious undertaking earnestly pursued. There was continuity in the operation. The annual outputs were not de minimis and the activity had a measure of substance. The basic principles on which the operation was run were regular and sound. The use of the property by the family reduced the activity and profit but not so as to be inconsistent with the regular and sound running of the operation. The supplies made were of a type commonly made by those seeking to make a profit.
The Tribunal therefore found that not only was the letting of the property a business but it was also one which was conducted with a view to making a gain.
The Tribunal also decided that the business was not one which consisted wholly or mainly of holding investments. It found that the services supplied to the holidaymakers were not such as could be described as being incidental to the holding of property as an investment. Nor was the work involved in promoting and managing the property.
Hewitsons are able to advise further on how additional services may help landlords of holiday accommodation obtain business property relief. It is a difficult area as there have been a number of decisions about the distinctions between businesses and investments, some of which have required more activity than was accepted in this case.
It is interesting to note that the Tribunal commented that HM Revenue and Customs have held over other cases awaiting the outcome of this case. It is not yet known whether HM Revenue and Customs will appeal.
For further information, contact Emma Satterly on firstname.lastname@example.org or on 01223 532725