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Upper Tribunal reverse the availability of Business Property Relief (BPR) on holiday cottages

14 Oct 2013

The Pawson case was originally heard by the First Tier Tribunal in 2012. The Tribunal agreed with the taxpayer that BPR should be available on the Fairhaven holiday cottage due to the level of service provided by the owners. In their view:

“We have no doubt that an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading. He would consider it to be a business asset to be exploited as part of the provision of services going well beyond an investment as such.”

This was heralded as good news to the taxpayer who could now hope to secure relief from Inheritance Tax on any holiday cottages potentially saving significant sums of tax on death.

However, not surprisingly, HMRC appealed to the Upper Tribunal who disagreed with the reasoning of the First Tribunal.

It made the following observations:

  • investment businesses may be actively managed;
  • the relevant test is not the degree or level of activity, but rather the nature of activities which are carried out – the letting of Fairhaven was a typical example of a property letting business, albeit one of a fairly specialist nature;
  • the need to find new occupants is, on any view, an activity that falls on the investment side of the line; and
  • “bare upkeep” was far too narrow a criterion to identify the property management activities which are part and parcel of holding property as an investment.

The only reasonable conclusion was that the business carried on at Fairhaven was mainly that of holding the property as an investment.

It is worth noting that a full-service B&B business should still qualify for BPR but any farmer letting out a property as a holiday cottage in isolation is unlikely to succeed.

The tribunal suggested that in any normal case an actively managed property letting business will not be regarded as a business activity to satisfy s.105 of the IHTA 1984 and it will take a significant departure from the norm to convince HMRC that BPR should apply to a holiday letting arrangement.

It is also worth reminding ourselves that BPR is an all of nothing question. When looking at a business it either qualifies or fails, there is no apportionment. This is particularly important where the business is a mix between trading and investment assets.

For further information contact Alison Hall on 0191 232 8345 or email alison.hall@hay-kilner.co.uk