Rare victory for the taxpayer in holiday accommodation tax case

First Tier Tribunal rules on “unique venue”

It is said that the determination of whether or not a particular business is wholly or mainly an investment business, and thus whether or not it qualifies for business property relief from inheritance tax (IHT), generates more litigation than any other area of inheritance tax law. Many of these cases involve let holiday accommodation and the latest case heard in the First Tier Tribunal (FTT) has resulted in a rare victory for the tax payer.

Mrs Graham’s estate and Carnwethers

At the time of her death Mrs Grace Graham owned an enlarged old farmhouse, Carnwethers, in the Isles of Scilly. Mrs Graham lived in Carnwethers and also ran a holiday accommodation business consisting of four self-catering flats or cottages which formed part of the property. Her executors claimed business property relief (BPR) from IHT on the value of Carnwethers. This claim was refused by HMRC on the ground that the business was not relevant business property as it consisted mainly of the holding of an investment. Mrs Graham’s executors appealed against HMRC’s decision.

The FTT’s decision

Carnwethers had originally been run as a hotel by Mrs Graham and her husband and the FTT stated that they had gained the impression that both the hotel and the subsequent holiday letting business had amounted to an “unique venue”. One factor mentioned by the FTT several times in its judgment was that Mrs Graham’s daughter, Louise, who had taken over the day-to-day running of the business from her mother, “was assiduous in making herself available to guests”, making suggestions as to holiday activities, being on hand for emergencies, organising special events, and buying fresh fish for the guests. It was accepted by the FTT that this level of service resulted in many repeat visits.

The FTT pointed out that “investment” has the meaning that an intelligent businessman would give to it and that the ownership of property for letting is generally an investment activity. However, they stated that there is a wide spectrum in the ownership of let property ranging from land subject to a tenancy to a hotel or shop. Businesses at the hotel/shop end of that spectrum would not be mainly investment properties and would qualify for BPR. The FTT said that in deciding where on that spectrum a particular business lies the business should be looked at in the round. In the FTT’s view there is no presumption that a business which involves the exploitation of land for profit is mainly an investment business. The tribunal judge disagreed with the conclusion reached in the recent case of Vigne (which is currently under appeal) that intention was a relevant consideration; instead in Mrs Graham’s case it was held that the objective pattern of use of an investment should be considered instead of intention, and that the whole picture must be taken into account.

When applying these principles to Carnwethers, the FTT found that certain activities (advertising, taking bookings, and repairing and maintaining the buildings) was the exploitation of land for profit, and on its own was capable of being an investment business which would not attract BPR. However, there were a host of activities that in the tribunal’s view did not amount to exploitation of the investment. These included the provision of food, drink, and household goods, bikes, games, books and extensive help, the organisation of events and the provision of furniture, clean linen and towels. The garden at Carnwethers was “exceptional” and thus in the FTT’s view its provision and maintenance amounted to a service to those who were staying there rather than a mere exploitation of the investment.

An exceptional case

In line with previously decided cases, the FTT held that the intensity of the activities was not relevant but the extent of the additional services provided was crucial. The Tribunal estimated in this case that the additional services took up more time than the maintenance of the building and management of the letting. Overall they felt that Carnwethers was an “exceptional case” of its kind and that it was not mainly an investment business and it did (just) qualify for BPR and a much reduced IHT bill.

The established law has been followed on this occasion and the case exemplifies how each individual situation has to be decided on its own facts and merits. Mrs Graham’s estate does, however, provide some useful indications to taxpayers in similar circumstances of the extensive extent of services that are regarded as necessary before, exceptionally, a holiday letting property can qualify for BPR.