The First-tier Tribunal – in N v Pawson (Deceased), published on 27 January 2012 – has allowed inheritance tax business property relief (BPR) in relation to a holiday let.
The deceased owned a cottage in a recognised holiday area, typically letting it out for two weeks at a time. Members of her family occupied the cottage for three weeks during the holiday season and paid rent – calculated with reference to HMRC’s literature on payments for private use. It was held that exploitation of the holiday cottage amounted to the operation of business and not one which consisted as the holding of an investment. BPR was therefore available on the full value of the cottage.
The decision is significant because property letting is generally considered to be an investment activity for BPR purposes. Relatively recently, HMRC altered their manuals to indicate that they would look more sceptically on claims for BPR in relation to holiday lets of this sort and IHTM 25278 now states:
Recent advice from the Solicitor’s Office has caused us to reconsider our approach and it may well be that some cases that might have previously qualified should not have done so. In particular we will be looking more closely at the level and type of services, rather than who provided them.
The fact that HMRC took this case to the Tribunal presumably demonstrates this new approach in practice; however, the Tribunal did not support HMRC’s view. Reference was made to the following factors:
- The services provided to the occupiers of the cottage appeared to be a significant part of the reason why the occupiers were prepared to book it for their holidays.
- The need for the owners to travel to the cottage from time to time when emergencies occurred.
- The efforts made to advertise it for letting.
- The fact that the cottage had been let every year without fail, albeit that it was usually only let in the summer months.
The Tribunal also found that the use of the cottage by family members for three weeks in the year did not disqualify it from being eligible for BPR.
Claims for BPR in the context of holiday lettings will inevitably turn on the facts relevant to a particularly property; however, the decision is nevertheless a useful indication of the approach the Tribunal will take.
For a review of the Business Property Relief position in relation to any property or company please contact the TaxDesk on 0845 4900 509 and ask for Ian Maston or Priya Dutta.