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Pawson case: Furnished lets will not get IHT relief

7th Feb 2013
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Hopes of major windfalls in the holiday letting industry were dashed when the upper tribunal overturned a first-tier ruling on business property relief in the case of HMRC v Pawson [2013] UKUT 050 (TCC).

The first-tier tribunal decision in late 2011 raised the possibility that other inheritors of furnished holiday homes would be able to claim business property relief (BPR) following the decision in favour of the hiers of Nicolette Pawson. By allowing BPR on a furnished holiday let (FHL) where only minimal services were provided, the decision opened the door to almost all the furnished holiday lets in the UK to claim BPR.

But after hearing the appeal evidence in December, upper tier judge Mr Justice Henderson determined that inheritance tax BPR should not be available in relation to the estate's furnished holiday let (FHL) property.

The judge concluded that the FTT erred in law in concluding that an ‘ordinary businessman’ would consider the letting business as not being one of mainly investment.  The weight of judicial authority 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 judge found.

His view of the law was 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
  1. There is no reason to consider that a furnished holiday letting business should be given any peculiar treatment in this context.

Under the precedent set in the Pawson case, furnished holiday lets would not normally qualify for BPR. The relief would only be available services provided to the holiday maker were more significant that the use of the land.

Gabelle Tax partner Ian Maston was one of the few who questioned the FTT decision last year, and doubted that many FHL properties would qualify for BPR following the appeal verdict.

“The First-tier Tribunal decision was always a little puzzling and this decision brings things much more into line with other BPR cases," Maston said.

"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."

Replies (8)

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By sallycox
11th Feb 2013 11:49


It would be a good idea if the government and HMRC were to decide once and for all about the status of FHLs. One minute they are a 'business' and qualify for the reliefs available to a business, and the next minute FHLs are not to be so treated.

How on earth can anyone plan for the future when such uncertainty prevails.

Thanks (1)
By hiu612
11th Feb 2013 12:29

HMRC opinion

The uncertainty seems to stem from one of many examples of HMRC deciding to revise their interpretation of an established position without any change to the underlying legislation. A bit like their recent shift on the situs of loan notes and what not in offshore jurisdictions.

The uncertainty is an annoyance, although most people would (i think) agree that all but the most keenly staffed FHL's do generate their income wholly or mainly through the exploitation of an investment.

Thanks (0)
By Mike Truman
11th Feb 2013 12:38

Fighting fund for appeal


Because of the substantial costs that HMRC might apply for in any appeal, a fighting fund has been set up by Francis Clark LLP to try to take this case to the Court of Appeal.

Contributions in units of £250 (and preferably of about £1,000 or more) are being sought from those with clients who would be affected.

A purse of about £30,000 would be needed.

For more details, including arrangements for dealing with surplus funds, email [email protected]


Thanks (2)
By Paul Soper
11th Feb 2013 13:18


Sally suggests that parliament should clarify this 'once and for all' - in fact they already did when the legislation was introduced in 1984 - FHLs are a deemed trade for IT and CGT purposes but Capital Transfer Tax (as it then was) was expressly NOT included.  Since then certain barristers seem to have decided that BPR should be available but this can only be possible if the activity satisfies the existing IHT - as it now is - conditions.

I know I always bang on about history but it should be borne in mind that these provisions were made in the 1980s when furnished holiday lettings were, like ordinary furnished lettings, assessable as a miscellaneous source of income under the old Schedule D Case VI - they were not a trade.  The revenue had, as a matter of practice, previously treated them as though they were a trade until it was pointed out by the courts that the income was derived from the granting of underlying property rights (even if for only a week or a fortnight) and so, within the old case of Salisbury House Estates v Fry (1930) could not be trading income.

The Thatcher government reacted by creating the reliefs for FHLs but did NOT include CTT - I think parliament has made it pretty clear that unless the activity is carried on such that it qualifies as a business in its own right but NOT an investment then BPR will not be available and that's exactly what this case confirms.

Thanks (5)
By lechiffre
11th Feb 2013 14:58

FHL "Additional services"

So what level of services is HMRC saying is necessary to qualify as a business for BPR ?

I have a client with 10+ letting units on one site, they provide full laundry and cleaning services and amenities like a pool etc. Is this enough? What more could (should) they do?




Thanks (0)
By Paul Soper
11th Feb 2013 15:07

The 'George' case

Whether an activity is letting, at one extreme, or a trade at the other, was considered in the George case - George & Loochin (Stedman's exors) 2004 - one of a number of cases concerning residential caravan parks with holiday activity.  This seems the best guidance available at the moment...

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By nogammonsinanundoubledgame
14th Feb 2013 13:29

There was another case as I recall

Rashid v Garcia.

That was all about eligibility to join the Class 2 NIC club.  Don't expect it would be very helpful.

With kind regards

Clint Westwood

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By Paul Soper
14th Feb 2013 18:24

Good point from Clint...

Given that Class 2 NIC is in point if you are in 'gainful employment other than as an employed earner' - it would be difficult to see how you could argue that you are NOT in business to trigger a Class 2 liability but IN business enough to get BPR.  Of course that is also why FHL is deemed to be trading for all purposes except BPR.

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