Inheritance Tax: Pawson case gets HMRC paws off furnished lets

In a perhaps surprising but helpful decision, the First Tier Tax Tribunal has ruled that a single let out property qualified for 100% relief from inheritance tax (IHT) as business property.

In the case of N V Pawson, HM Revenue & Customs (HMRC) argued that a single property rented out with minimal advertising and service provision was not  a business but an investment. The judge disagreed, saying that “an intelligent businessman would not regard . . . a holiday letting property as an investment as such and would regard it as involving far too active an operation”.

Furnished holiday lettings but not as we know them

IHT does not use the statutory definition of furnished holiday letting that applies for income tax and CGT purposes: the question is simply “Business or investment?” and those two terms are mutually exclusive. An asset whose exploitation is a business cannot be regarded as an investment.

What is the issue?

In Pawson there was only a single property and the amount of work involved in managing the lettings was not onerous: Mrs. Pawson did not use modern advertising such as the internet and the range of services was restricted to laundry, cleaning, television and phone.

The case is more favourable than might previously have been assumed under case law that largely relates to letting holiday accommodation in the form of static caravan sites on farmland and HMRC’s reliance on cases relating to short term business lettings as opposed to holiday lets in particular.

Who benefits from this decision?

Individuals, trustees and shareholders of companies who operate furnished holiday lettings are the obvious ones but there may be others who do not fit the usual furnished holiday letting criteria, such as non-residential property.

Any property rented out short-term with additional services may now be protected from inheritance tax by BPR, especially holiday lets that don’t meet the strict income tax and CGT criteria.

What to do

It may be possible to correct the IHT account and reclaim the tax overpaid on death or a lifetime gift.

As regards current planning:

  • review wills, especially if they make specific provisions for business property;
  • review and reorganise borrowings;
  • don’t put property into trust before considering BPR;
  • trustees should consider whether business property relief could now apply, affecting ten-yearly charges and appointments to beneficiaries; and
  • keep evidence to show that the property is managed in a businesslike way with a view to profit, i.e. as a business rather than an investment.

For more information please contact Chris Williams.

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