The Courts have once again been considering the question of Business Relief (BR) from Inheritance tax (IHT), and property that is wholly or mainly investment property, in a case where a claim for BR on a chargeable transfer was denied by HMRC.
The case in question is one of a number where BR has been denied on a property let for holidays on the grounds that BR under the Inheritance Tax Act 1984 is not available for property that is investment property. It is said that this issue has generated more case law than any other single IHT issue.
The most recent leading case in this area (Pawson v HMRC in 2013) was decided in favour of HMRC. In this latest case Counsel attempted to distinguish its facts from those of Pawson, but the holiday let in question was deemed to be investment property.
In 2003 Mrs Green bought Flagstaff House for £900,000. The property was divided into five self-catering holiday lets which Mrs Green continued to run as a holiday letting business. By 2010 Flagstaff House was valued at £1.9 million and in April of that year Mrs Green transferred 23% of the property into trust with a further transfer of 62% of the property to the trust in 2012. Returns were made to HMRC reporting the transfers (which were chargeable transfers for IHT) and claiming 100% BR. HMRC refused the claim stating that the property did not qualify for BR as it was mainly investment property.
The Pawson case set a high bar for owners of holiday letting properties wishing to claim BR and established that the owners of holiday letting property would have to show that substantial additional services were provided to holidaymakers over and above those services that flowed naturally from the occupation of land in order to qualify as non-investment property. In the case of Flagstaff House the services provided were near identical to those in the Pawson case, although the level of income was higher as Mrs Green owned five units, whereas only one unit, Fairhaven, was owned in Pawson.
In Mrs Green’s case, Counsel attempted to distinguish Flagstaff House from the business in Pawson, on the grounds that the level of activity and income was higher than Fairhaven, Flagstaff House had a website and marketing strategy unlike Fairhaven, and the income derived from letting the property for holidays was much higher than could be achieved by letting it on short-term residential tenancies. Counsel argued that this higher level of income must be attributable to the services provided to holidaymakers.
Sadly for Mrs Green the First Tier Tribunal (FTT) did not agree with her Counsel, finding the level of services provided to be “relatively minor” and deciding that the fact that the activity was on a bigger scale was immaterial, as it was stated in Pawson that “the degree and level of activity is not relevant” and that what mattered was the nature of the activity. The FTT found that the difference between the income derived from holiday letting as opposed to residential letting was due to market forces and not to the services provided.
The claim for BR was refused, meaning that Mrs Green must be facing a lifetime charge to IHT at 20% on the value of the shares of Flagstaff House transferred to the trust. If, however, Mrs Green survives by seven years from the date of the transfers to the trust, the gifts should fall out of account and she will escape a 40% IHT charge on that part of the property.