Revenue and Customs Commissioner v Lockyner and Another (Personal Representatives of Pawson, Deceased)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 January 2013 |
| Neutral Citation | [2013] UKUT 50 (TCC) |
| Date | 28 January 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 50 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Henderson J.
Christopher McNall (instructed by the Solicitor to HMRC) for the appellants.
Keith Gordon and Ximena Montes Manzano (instructed by Pawson & Co) for the respondents.
The following cases were referred to in the decision:
Cook (HMIT) v Medway Housing Society LtdTAX [1997] BTC 63
Edwards v BairstowELRTAX [1956] AC 14; (1955) 36 TC 207
IR Commrs v Desoutter Bros LtdTAX (1945) 29 TC 155
IR Commrs v GeorgeUNKTAX [2003] EWCA Civ 1763; [2004] BTC 8,003
McCall v R & C CommrsTAX [2009] NICA 12; [2009] BTC 8,059
Martin v IR CommrsSCD (1995) Sp C 2
Salisbury House Estate Ltd v Fry (Inspector of Taxes)ELR [1931] 1 KB 304
Stedman's Executors v IR CommrsSCD (2002) Sp C 323
Tootal Broadhurst Lee Co Ltd v IR CommrsTAX (1946) 29 TC 352
Weston v IR CommrsTAX [2000] BTC 8,041
Inheritance tax - Business property relief - Holiday let - Holiday letting business of bungalow carried on for profit - Whether business consisted mainly of holding investment - Whether business property relief available in respect of deceased's share of property - HMRC's appeal allowed - Inheritance Tax Act 1984, Inheritance Tax Act 1984 section 105s. 105.
This was an appeal by HMRC from a decision of the First-tier Tribunal ([2012] UKFTT 51 (TC); [2012] TC 01748) holding in favour of executors that the holiday letting of a bungalow, in which the deceased had had a 25 per cent share, constituted the operation of a business with a view to gain, and that the business was not one which consisted wholly or mainly of the holding of an investment within the Inheritance Tax Act 1984, s. 105(3).
At the date of her death in June 2006 the deceased owned a 25 per cent beneficial interest in the property. The remaining 75 per cent was owned equally by her three children. The executors claimed that her share in the property qualified for 100 per cent relief as "relevant business property" within the meaning of Chapter I of Part V of the Inheritance Tax Act 1984 (IHTA 1984) as amended. The basis of the claim was that the bungalow had been used for the two years preceding her death for the purposes of a holiday letting business carried on for gain, with the result that her share in the property consisted of "a business or interest in a business" within s. 105(1)(a) of IHTA 1984; and that her share was not disqualified from being relevant business property by s. 105(3), as "a business or interest in a business … consist[ing] wholly or mainly of … making or holding investments". The claim was rejected by HMRC on the basis that there was no qualifying business, and if there was it consisted mainly of holding an investment.
The FTT allowed the executors' appeal, finding that the exploitation of the bungalow by the family in the two years before the deceased's death had constituted the operation of a business with a view to gain, and that the business was not one which consisted wholly or mainly of the holding of an investment. As part of the holiday letting business, certain services were provided to occupants. They consisted of provision of the services of a cleaner/caretaker; the provision of space heating and hot water; the provision of television and telephone at the property; being on call to deal with queries and emergencies; the provision of a welcome pack; and laundry services. The FTT found that the services provided went well beyond those which an intelligent businessman would regard as falling on the investment side of the line, so that the non-investment services were of such a nature and extent that the business was not even mainly one of holding the property as an investment. HMRC appealed, arguing that the business was "mainly" one of holding the property as an investment and that the FTT had applied the wrong test and came to the wrong conclusion.
Held, allowing HMRC's appeal:
1.The "investment business" exception in IHTA 1984, s. 105(3) involved an all or nothing test: either the property in question was relevant business property, and qualified for relief in full, or it was not.
2.Property management formed part of the business of holding property as an investment, including maintenance of the property as an investment as well as the activity of finding tenants and arranging leases or licences. There was a distinction between such management activities and the provision of additional services or facilities to the tenants or occupants, whether they were separately charged for or included in the lease and covered by the rent. The characterisation of such services depended on the nature and purpose of the activity, and not on the terms of the lease or site licence. Nevertheless, where the business was one of letting a building, the provision of additional services or facilities to the occupants was unlikely to be material because they would not be enough to prevent the business remaining mainly one of holding the property as an investment. It followed that in any normal property letting business, the provision of additional services or facilities of a non-investment nature would either be incidental to the business of holding the property as an investment, or at least would not predominate to such an extent that the business ceased to be mainly one of holding the property as an investment. (IR Commrs v George [2003] EWCA Civ 1763; [2004] BTC 8,003 applied.)
3.Caution was needed before interfering with any decision of the fact-finding tribunal, but the starting point was that the owning and holding of land in order to obtain an income from it was generally to be characterised as an investment activity. Further, such an investment might be actively managed without losing its essential character as an investment. Accordingly, the fact that the co-owners had carried on an active business of letting the property to holidaymakers did not detract from the point that the business was basically one of an investment nature. (see Martin v IR Commrs (1995) Sp C 2, Weston v IR Commrs [2000] BTC 8,041 and IR Commrs v George considered.)
4.On the basis of its findings of primary fact, the only conclusion which was reasonably open to the FTT was that the business carried on at the property remained one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, aimed at maximising the income which the family could obtain from the short-term holiday letting of the property. Looking at the business in the round, there was nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and certainly no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature. The FTT reached its conclusion by seeking to apply the test of how an intelligent businessman would regard the business. It did not explain, however, how an intelligent businessman could conclude that the services elements outweighed the investment elements to such an extent that the mainly test was no longer satisfied. The FTT had misdirected itself and should have concluded that the property was held mainly as an investment. HMRC's refusal of business property relief was reinstated.
1."Fairhaven" is a large bungalow overlooking the sea on the Suffolk coast near Aldeburgh. At the date of her death on 20 June 2006 Mrs Nicolette Vivian Pawson ("Mrs Pawson") owned a 25% beneficial interest in the property. The remaining 75% was owned equally by her three children: Mrs Francesca Lockyer and Mrs Caroline Robertson (who were also her executors), and her son Mr Nicholas Pawson.
2.Mrs Pawson's share in the property formed part of her estate for inheritance tax ("IHT") purposes, and in due course her executors claimed that it qualified for 100% relief as "relevant business property" within the meaning of Chapter I of Part V of the Inheritance Tax Act 1984 ("IHTA 1984") as amended (Inheritance Tax Act 1984 section 103s. 103 to 114). The basis of the claim, briefly stated, was that Fairhaven had been used for the two years preceding Mrs Pawson's death for the purposes of a holiday letting business carried on for gain, with the result that her share in the property consisted of "a business or interest in a business" within Inheritance Tax Act 1984 section 105 subsec-or-para 1s. 105(1)(a) of IHTA 1984; and that her share was not disqualified from being relevant business property by Inheritance Tax Act 1984 section 105 subsec-or-para 3s. 105(3), which provides so far as material that: "A business or interest in a business … are not relevant business property if the business … consists wholly or mainly of … making or holding investments."
3.The claim was debated in correspondence but was ultimately rejected by the Commissioners for Her Majesty's Revenue and Customs ("HMRC"), who issued a notice of determination on 1 October 2008 saying that "none of the value transferred in respect of the deceased's share in "Fairhaven" … was attributable to the value of relevant business property". The executors appealed against the notice, and the determination was also reviewed by a senior officer of HMRC's Trusts and Estates office in Nottingham, Mr Robert Brown, who wrote to Mrs Lockyer on 26 July 2010 explaining why in his view the notice of determination should be upheld. In his letter Mr Brown made it clear that HMRC would wish to argue that there was no qualifying business at all, as well as that the business (assuming there to be one) was mainly a business of holding investments.
4.The executors' appeal was heard by the Tax Chamber of the First-tier Tribunal (Judge Richard Barlow and Ms Susan Stott FCA, "the FTT") sitting in Leeds on 7 and 8 November 2011 ([2012] UKFTT 51 (TC); [2012] TC 01748). The...
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