UK: Battle joined over IHT relief for holiday lettings

The most highly-charged field is currently entitlement to business property relief (BPR) from IHT. It is a very valuable relief for the owners' successors, but HMRC invariably tries to deny it to furnished holiday lettings on the basis of s.105(3) of the Inheritance Tax Act 1984. This denies BPR to businesses that 'consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments'.

HMRC's usual position is that most people own holiday lets as investments in the underlying land, rather than as income-generating businesses like hotels, or bed and breakfast accommodation. This view was supported by the England and Wales Court of Appeal in the George case in 2004, and in McCall in 2009, says IHT and probate expert Professor Lesley King TEP.

The Upper Tax Tribunal followed this view in the Pawson case in 2013, with Henderson J explicitly stating: 'I take as my starting point the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity ... the fact that the Pawsons carried on an active business of letting Fairhaven to holidaymakers does not detract from the point that ... the business was basically one of an investment nature.'

The taxpayer in Pawson was not permitted to proceed to appeal, with Lord Justice Briggs stating that there was no realistic prospect of the appeal succeeding, because ordinary property lets did not provide sufficient additional services to qualify as a business. This appeared to establish the precedent, and was followed by a series of defeats for taxpayers.

However, the vagueness of the statute's wording does allow room to challenge this view, depending on the circumstances. Several tribunal cases have recently been fought on the principle, with varying outcomes, most notably the recent First-tier Tax Tribunal case of Personal Representatives of Grace Joyce Graham deceased v HMRC (2018 UKFTT 306 TC).

In the Graham case, the taxpayer challenged Henderson J's 'starting point' that holding land to obtain an income is essentially an investment. Rather, she said, there is a spectrum, with basic letting or leasing at one end, and hotel-keeping or letting combined with the provision of other activities and services at the other. Guests to Mrs Graham's lettings were provided with many other services, such as a pool, sauna, bikes, and generous personal care. The First-tier Tax Tribunal agreed with the late Mrs Graham's executors that the land was not held mainly for investment purposes, and granted BPR to the estate.

Jamie Younger, of Saffery Champness's Landed Estates Group, notes that the case is a breakthrough for holiday lets, calling a halt to the long run of cases in which HMRC has succeeded in denying BPR.

'Many [holiday let owners] were wondering whether interpretation of the rules had effectively changed [against them] for good', he commented. 'That, given this latest case, is clearly not the situation. Whilst highly subjective in judgment, it is the type, quality and extent of services provided over and above the accommodation itself that will clinch the argument.'

Further cases are now being brought on this principle, with each aiming to establish that they lie on the 'additional services' end of the spectrum. The next eagerly awaited decision, says King, will be that of the Upper Tribunal in Vigne v HMRC. In that case (2017 UKFTT 632 TC) the First-tier Tax Tribunal judge, Geraint Evans, granted business property relief for a livery business, noting that 'no properly informed observer could or would have said that the deceased was in the business of holding investments'. That could have much wider implications for activities such as grouse-shooting on landed estates, and as a result HMRC has appealed the Vigne finding.

'The position continues to be that you must be bordering on the nature of a hotel or B&B before you can hope to get relief', comments King, writing in the Law Gazette. 'Even then, the glut of these cases passing through tribunals demonstrate HMRC's willingness to tie matters up in dispute for years and to force taxpayers to the stress and cost of a tribunal hearing. Will your executors have the money and the stomach to take up the fight, which in Mrs Graham’s case has lasted over five years beyond her death?'

Sources

• Law Gazette
• UHY Hacker Young
• BAILII (Graham case)
• BAILII (Vigne case)