by Andrew Robertson, Trainee Solicitor

Further to our post, ‘Victory in Vigne – A Break for Business Property Relief?’, featured on the Turcan Connell blog in November 2018, here we outline the position in relation to business property relief (BPR) and holiday lettings businesses as considered in the recent case of Executors of the Estate of Ross v HMRC [2017] UKFTT 507 (TC). 

The facts 

Mrs Ross died in 2011 with an estate including a two-thirds share in a partnership that owned eight holiday cottages, two staff flats (both in Cornwall) and a further property also let out as holiday accommodation in Weymouth. Those eight cottages were rented out as holiday lets with one of the two flats let to a nearby hotel for its employees to use and the other to the partnership’s only employee, the handyman, who was on call seven days a week. 

It is important here to emphasise the connection between the hotel and the partnership. The two had an agreement whereby the holidaymakers staying in the holiday cottages had access to the extensive services offered by the hotel, for example, dining at the hotel, laundry services, car parking, use of free Wi-Fi, etc. 

BPR 

BPR is a relief from inheritance tax which is available on ‘relevant business property’ at the rate of either 100% or 50% (s 105 Inheritance Tax Act 1984 (IHTA)). Relevant business property includes a business or an interest in a business (s 105(1)(a) IHTA) and where this applies, the relief is 100%. Relief at 50% is available on land or buildings owned by the deceased but used in the business. 

However, under s 105(3) IHTA, BPR does not apply where that business is wholly or mainly concerned in the dealing with land or buildings or making or holding investments. 

Application to the current case 

As the partnership in the current case owned land and buildings, for BPR to apply, it was necessary to show that the business was not wholly or mainly involved in investment activity, ie it offered services other than simply a cottage to stay in for the duration of a holiday. 

The executors of Mrs Ross’s estate argued that the extra services offered by the cottages, in conjunction with the hotel, provided a greater holiday experience than simply the exclusive right to stay in the cottage for a period of time. Indeed, to reinforce this idea, they highlighted that in one year, around 67% of the partnership’s expenditure related to these services, or, in other words, to non-investment business. 

On the other hand, HMRC argued that the bar is set extremely high to prove that a holding in land is mainly a non-investment activity and cited the case of HMRC v Personal Representatives of Pawson [2013] UKUT 50 (TCC) in which Henderson J stated, ‘the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity’. It was for the executors to displace this presumption. 

The decision 

Ultimately, the bar proved too high for the executors to meet. 

The First-tier Tribunal took, as a starting point, the argument set out by HMRC in the Pawson case. This position differs slightly from that in Personal Representatives of the Estate of Vigne v HMRC [2017] UKFTT 632 (TC) in which the tribunal took a more balanced approach by first considering the facts of the individual case, and then categorising the business as one of wholly or mainly investment or non-investment activities. 

The tribunal in Ross went on to consider the business as a whole in order to ascertain its fundamental purpose. They noted that no matter the standard and breadth of services provided, guests of the holiday cottages ultimately wanted access to a property to ‘call their own’ and, therefore, the essence of the business is that of renting land and buildings for a specific period of time. This is an activity that consists mainly of the investment in land and property and, consequently, BPR could not apply.                       

Summary 

The tribunal in Ross noted that the test is qualitative and not quantitative, with there being a spectrum on which different types of business lie. However, many commentators argue that due to the judgment in Ross, nothing short of a hotel type business would displace the presumption and allow BPR to apply. 

To be considered a non-investment business, a holiday lettings business similar to that in Ross would have to offer a very significant variety of services. Indeed, the land or buildings would somehow need to be ancillary to the primary purpose of the concern so that the investment is not mainly in land or buildings. 

Due to this decision, it is not sensible to rely on the availability of BPR in cases with facts similar to the above, and advice should be sought at an early stage. If you have property which is used in a trading business and are unsure if it could qualify for BPR, please do get in touch. We would be happy to provide advice, or review your situation.