The Court of Appeal has rejected, for the final time, the executors of Nicolette Pawson application for leave to appeal the Upper Tribunal‘s decision in HMRC v Pawson (deceased) [2013] UKUT 050 (TCC) that a let holiday cottage was held mainly as an investment and so did not qualify for business property relief (BPR) for inheritance tax (IHT).

The Pawson family jointly owned and operated a holiday cottage in Suffolk, with the late Mrs Pawson owning a ¼ share. When Nicolette Pawson died, her executors claimed that her ¼ share was entitled to BPR from inheritance tax. HMRC denied BPR on the grounds that the business consisted ‘wholly or mainly’ of making or holding investments, which disqualified it under s105(3) of the Inheritance Tax Act.

the “investment business” exception in section 105(3) of IHTA 1984 involves an all or nothing test: either the property in question is relevant business property, and qualifies for relief in full, or it is not.”

Paragraph 16 HMRC v Pawson (deceased) [2013] UKUT 050 (TCC)

The executors went to the First Tier Tax Tribunal, which ruled in their favour on the grounds that operating a holiday cottage involved providing services, which an investment business would not have done. HMRC appealed to the Upper Tribunal, which in January 2013 overruled the First Tier judgement (HMRC v Pawson, 2013 UKUT 050 (TCC)).

Leave to appeal was denied by the Upper Tribunal and the Court of Appeal itself in response to a written application. The executors made a final oral application, but in earlier October 2013 this was rejected by Lord Justice Briggs. There was, he said, no realistic prospect of the appeal succeeding, because ordinary property lets did not provide sufficient additional services to qualify as a business.

This result is not the end of the world for owners of furnished holiday lets seeking IHT relief. It serves only to underscore that they will have to provide holidaymakers with significantly more services than the Pawson family did if in order to claim BPR – although how much service provision is necessary to stop the holiday let being ‘wholly or mainly’ an investment remains a continuing area of controversy.

It remains to be seen whether HMRC will run with this decision and now fight all BPR claims in relation to furnished holiday lets to the death or whether they will take a more moderate line. Will HMRC now routinely refuse relief on all businesses which involve the occupation of land for a return?

I take as my 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.Further, it is clear from the authorities that such an investment may be actively managed without losing its essential character as an investment…”

Paragraph 42 HMRC v Pawson (deceased) [2013] UKUT 050 (TCC)

While BPR claims relating to businesses that involve the letting of buildings will continue to be decided on their facts, the latest decision in Pawson has at least laid down a marker on the scale for the level of services that will be insufficient to establish entitlement to BPR on furnished holiday lets. We wait with interest to see how aggressively HMRC will seek to apply the Pawson decision.