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The deceased taxpayer had owned a property, a bungalow near Aldeburgh. It was let fully furnished as a holiday home and jointly owned by the taxpayer and members of her family. They had use for three weeks a year.
In the years leading up to the death of the taxpayer, the property generated profits in 2003/04 and 2004/05, but a loss in 2005/06. The year of her death, 2006/07, showed a profit.
The executors, who were the deceased’s daughters, claimed business property relief in respect of the bungalow on the basis it had been used for the purposes of a holiday letting business carried on for gain.
HMRC refused the claim, saying there was no qualifying business other than that of holding an investment.
The First-tier Tribunal allowed the taxpayers’ appeal.
The judge accepted the property had been run as a business for more than the two years before the taxpayer’s death. The fact the family had use of the property for three weeks a year did not prevent it being run as a holiday let.
The tribunal concluded that because the business had been profitable before the mother died and was running profitably in the year of her death, it was being run with a view to gain that satisfied IHTA 1984, s 103(3).
As to whether the business was one that consisted wholly or mainly of the holding of an investment, the tribunal referred to George & Loochin (Stedman’s Executors) v CIR [2004] STC 163 and concluded 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”.
HMRC appealed.
The Upper Tribunal judge, Mr Justice Henderson, took as his starting point “the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity”.
He said the property could be managed actively and still be retained as an investment: the fact the taxpayers carried on an active business in running the bungalow as a holiday let did not prevent it being an investment business.
The activities that would fall on the investment side of the line included finding occupants, making arrangements with them, collecting the rent, expenditure on repairs, maintaining the bungalow and the garden, and keeping the property insured.
These all enhanced the capital value of the property and made it possible to obtain a regular income from its letting.
The services provided to clients, such as cleaning, providing a welcome pack, and being on call to deal with queries and problems, were unlikely to be significant or sufficient to stop the business from being “mainly one of property investment”.
The judge concluded the First-tier Tribunal should have found that “the business… did indeed remain one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property”.
He did not accept the taxpayer’s argument that the innate character of a holiday letting business rendered it outside the scope of a normal property letting business. Rather, it was a typical example of a property letting business.
Mr Justice Henderson ruled that the First-tier Tribunal had misdirected itself, and the only possible conclusion was that the property was held mainly as an investment.
HMRC’s appeal was allowed.
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Because of the substantial costs that HMRC might apply for in any appeal, a fighting fund has been set up by Francis Clark LLP to try to take this case to the Court of Appeal. Contributions in units of £250 (and preferably of about £1,000 or more) are being sought from those with clients who would be affected. A purse of about £30,000 would be needed. For more details, including arrangements for dealing with surplus funds, send an email. |
