Executors of the Estate of Ross (Deceased)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 June 2017 |
| Neutral Citation | [2017] UKFTT 507 (TC) |
| Date | 20 June 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0507 (TC)
Judge Rachel Short
Ms Montes Manzano of Temple Tax Chambers appeared for the appellants
Dr Christopher McNall, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Inheritance tax – Business property relief – Let holiday cottages – Whether business mainly making or holding investments – Qualitative test – Level of services provided – Held – Despite high level of services main character of business was investment in land-appeal dismissed.
The First-tier Tribunal (FTT) concluded that a business of providing self-catering accommodation was mainly a business of making investments in land in spite of the high level of additional services provided.
Mrs Ross was a partner in the Green Door Cottages Partnership which owned eight holiday cottages and two staff flats in Cornwall and a property in Weymouth, also let out as holiday accommodation. One of the two staff flats was let on a long lease to a nearby hotel and used for the hotel's staff and the other was let to an employee (handyman) of Green Door Cottages. Mrs Ross and her husband had previously owned the hotel but this had been sold after her husband's death when Mrs Ross was no longer fit enough to run it. Business property relief was claimed on the whole of Mrs Ross's 2/3 share of the Green Door Cottages Partnership. HMRC argued that the partnership share was not relevant business property because it consisted “mainly of [ ] making or holding investments”.
The appellants argued that the business was that of running and managing holiday cottages. Over half of the partnership's expenses were non-property related, and Mrs Ross's daughter, Mrs Oldrieve, spent many hours per week running the business. The FTT found as a fact that the services provided to guests were above the standard level of services for self-catering cottages, also including services (such as reception facilities and provision of bar meals) provided by the hotel (for which the partnership paid a commission to the hotel), the availability of a resident on-site caretaker, and the personal presence of Mrs Oldrieve to welcome guests and ensure their holidays ran smoothly. The FTT provided the following useful summary of the principles established in previous cases based on renting land:
- the owning and holding of land to earn rental income is generally to be treated as an investment activity;
- the holding of land can included non-investment activities;
- the test under IHTA 1984, s. 105 requires a consideration of whether those non-investment activities are more significant than the investment activities;
- the question of whether a business is mainly an investment business is a question of fact and degree;
- the question of whether something is an investment activity is not limited to passive investment activities such as long leases managed by managing agents;
- the holding of land may be incidental to the running of a business (as in a hotel or holiday camp) or may be the essence of the business;
- accounting evidence and the profits or expenses allocated to the investment and non-investment activities of the business is one factor but is not the decisive factor;
- additional services provided to a rental property are unlikely to be material and in a normal property rental business additional services will either be incidental or will not be sufficient to prevent the business being one of mainly holding investments;
- the characterisation of any additional services provided depends on the nature and purpose of the activity and not on the terms of any lease;
- to come to a conclusion the business must be looked at in the round;
- the test to be applied is that of an intelligent business person concerned with the use to which an asset is put and the way it is turned to account.
However, having applied those principles to the facts they concluded that however high the standard of service provided and whatever the level of expenditure incurred on those services, what was being provided was self-catering accommodation (noting also that it was described as such in advertising literature). Looking at the business “in the round”, what the guests of the business were really paying for was access to a property to use as their own in a beautiful location for a specified period, the essence of which was the right to rent land, hence the activity consisted mainly of investment in property and the appeal would be dismissed.
(The appeal in relation to the staff flats also failed, given that the level of service provided to the flats was less than that provided to the cottages, as it did also in relation to the property in Weymouth (which provided a similar level of services to the other cottages, albeit through an agent, hence should be regarded as on a par with the other cottages)).
This case indicates yet again the difficulty of demonstrating that a property rental business that also provides services is a business providing services which includes the provision of property to rent rather than mainly a property investment business which includes the provision of services (see also R & C Commrs v Lockyer (personal representatives of Pawson (dec'd)) [2013] BTC 1,605; Green [2015] TC 04519).
[1] This is an appeal against a determination issued by HMRC on 27 October 2015 to the executors of the estate of Mrs Marjorie Ross under s 221 of the Inheritance Tax Act 1984 stating that the property comprised in the partnership of which Mrs Ross was a partner (“the Green Door Cottages Partnership”) did not qualify for business property relief under s 104 Inheritance Act 1984. (“IHTA 1984”)
[2] The Appellants requested a statutory review, which confirmed HMRC's original view by letter to the Appellants on 29 January 2016. The Appellants appealed to this Tribunal on 26 February 2016.
[3] The Appellants' appeal is on the basis that the whole of the property comprising Mrs Ross' two-thirds share of the Green Door Cottages Partnership is eligible for relief as business property, the business being the running and managing of eight holiday cottages and two staff flats situated at Port Gaverne in Cornwall and a property known as UpsideDown House in Weymouth.
[4] The total value of that two-thirds share was stated in the IHT 400 completed after Mrs Ross' death as £874,304.00. This was subsequently adjusted to £1,006,577.
[5] HMRC's position is that the property in question is property of a business which mainly consists of investment in land and so does not fall within the definition of “business property”, but is instead property of a business which consists “mainly of making or holding investments”.
The following matters were agreed between the parties;
[6] A partnership, the Green Door Cottages Partnership, existed for the relevant period. Mrs Marjorie Ross was a partner in that partnership.
[7] The Green Door Cottages Partnership was carrying on a business.
[8] The business of the Green Door Cottages Partnership did not consist “wholly” of making or holding investments.
[9] Mrs Oldrieve is authorised to represent the executors of Mrs Marjorie Ross' estate.
[10] The burden of proof to demonstrate that the Green Door Cottages Partnership business is eligible for relief under s 104 IHTA 1984 is on the Appellants.
[11] The hearing before me on 21 February 2017 commenced with a consideration of a number of preliminary issues concerning the accounting evidence which had been provided by the Appellants to demonstrate the character of the activities carried on by the deceased through the Green Door Cottages Partnership.
[12] On 7 February 2017, 14 days before the Tribunal hearing, the Appellants served a supplementary witness statement and exhibits, including schedules detailing expenses analysis, setting out how expenses had been allocated to the deceased's Green Door Cottages Partnership business for the periods 2009–2012. Given the significance of the expense analysis to the matter in dispute, I decided to allow these schedules to be considered by the Tribunal despite the fact that, as Mr McNall contended, this was new evidence which had been served late.
[13] The Respondents served their skeleton argument on 14 February 2017 and this referred briefly to grounds of challenge to the Appellants' accounting evidence. Before the Tribunal Mr McNall said that this extended to the Respondents contending that some of this accounting evidence was wrong. Ms Montes Manzano pointed out that the Respondents had not previously challenged any of the Appellants' accounting evidence and that the Appellants were not in a position to counter any of those challenges at the Tribunal without evidence from the Appellants' accountants.
[14] Given the significance of the accounting evidence to the parties' arguments about the character of the activities being carried on by the deceased, it was agreed between the parties that the hearing should be adjourned in order for HMRC to particularise their challenges to the accounting evidence and for the Appellants to respond and provide any further witness evidence which they considered appropriate.
[15] The hearing was adjourned until 10 May 2017.
[16] Mrs Marjorie Ross died on 7 November 2011.
[17] Her estate included a two-thirds share in a partnership, the Green Door Cottages Partnership, which owned eight holiday cottages and two staff flats, known as Green Door Cottages and a property in Weymouth known as UpsideDown House. During the relevant period the eight cottages were rented out as holiday cottages. Of the two flats, one was on a long lease to the hotel across the road and used for occupation by the hotel's staff. Another was rented out to the only employee of Green Door Cottages, the handyman, Mr Howell. Mrs Ross occupied one of the cottages for the period from 1992 until August 2007. UpsideDown House was also rented out as...
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