The Upper Tribunal has overturned the First-tier Tribunal’s (FTT) decision in the case of HMRC v Pawson  (UKUT 050 (TCC), published 31 January 2013). It has determined that inheritance tax business property relief (BPR) should not be available in relation to a Suffolk property let as a ‘furnished holiday let’.
We reported on the FTT’s decision back in February 2012, and all the background facts and a summary of the FTT’s decision can be read here.
The Upper Tribunal has now held that the FTT erred in law in concluding that an ‘ordinary businessman’ would consider the letting business as not being one of mainly investment. This was on the basis that the weight of judicial authority forcibly implied that for any business in which the principal activity involved deriving income from the occupation of land, the starting point would be that the business is ‘mainly’ one of investment. Only at the far end of the spectrum of possible letting businesses will the business also involve the provision of services so extensive as to override the investment element. The decision contains a very useful and detailed review of the relevant case law.
The decision is a significant one for all owners of ‘furnished holiday lets’. The FTT decision – in allowing BPR to a furnished holiday let where only minimal services were provided – opened the door to almost all the furnished holiday lets in the UK qualifying for business property relief.
The Upper Tribunal’s decision turns this on its head. Henderson J held that:
(1) In any ‘normal’ case even an actively managed property letting business would be considered as an ‘investment’ business which should not qualify for BPR; and
(2) There is no reason to consider that a furnished holiday letting business should be given any peculiar treatment in this context.
Thus, it would appear that the starting point for furnished holiday lets is that they would not normally qualify for BPR and that only where the level of ‘services’ provided to the holiday maker is so extension as to be more significant than the use of the land per se, will BPR be available.
This decision brings things much more into line with other BPR cases. It is clearly bad news for the owners of furnished holiday lets because the clear implication is that not many of them will qualify for BPR on a proper application of the law. Each case will, of course, depend on its own facts and this decision should not preclude all furnished holiday lets from qualifying for BPR. However, it is clear that the owners of the property will be required to provide significantly more ‘services’ to the holidaying occupiers than was the case here.