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 Ross’s Executors v HMRC [2017] UKFTT 507 (TC).

BPR

Business property relief, under s 105 of the Inheritance Tax Act 1984 (IHTA 1984), can represent an effective exemption from inheritance tax. There are terms and conditions of course; in particular the relief will not apply if the business ‘consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks or shares, land or buildings or making or holding investments’ (IHTA 1984, s 105(3)).

In contrast to Vigne’s Personal Representatives v HMRC [2017] UKFTT 632 (TC), which involved a livery business, the tribunals have commonly held that letting property is a business which consists wholly or mainly in the making or holding of investments. Obtaining BPR for such a business is often seen as an uphill struggle, and Ross supports this view for the reasons outlined below.

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. 

Provision of services

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 Pawson’s Personal Representative’s [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 Vigne 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, as in Graham’s Personal Representatives v HMRC [2018] UKFTT 306 (TC), 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.