HMRC v Pawson [2013] UKUT 050 (TCC)

Analysis

The Commissioners for Her Majesty’s Revenue and Customs (HMRC) appealed from the decision of the Tax Chamber of the First tier Tribunal (FTT) dated 14 December 2011 ([2012] WTLR 665) to allow an appeal against a notice of determination dated 1 October 2008. The respondents were the personal representatives of Nicolette Vivian Pawson (Mrs Pawson). The notice had determined that Mrs Pawson’s 25% interest in a property known as Fairhaven, Thorpeness, Suffolk (Fairhaven) was subject to inheritance tax on a deemed disposal at the date of her death. Fairhaven was a large bungalow overlooking the sea in a holiday area, which had been let out to holidaymakers for several years. The respondents contended that Mrs Pawson’s interest in Fairhaven was entitled to relief as a relevant business property on the basis that:

1. (i) it had been used for the two years preceding Mrs Pawson’s death for the purposes of a business carried on for gain; and
2. (ii) Mrs Pawson’s share was not disqualified from being relevant business property by s105(3) of the Inheritance Tax Act 1984 (IHTA 1984) in that it did not consist ‘wholly or mainly of… making or holding investments’.

HMRC’s position was that Mrs Pawson’s share was not entitled to relief as relevant business property on the basis that:

1. (i) there was no qualifying business at all; or
2. (ii) if there was a business then it was mainly a business of holding investments.

The FTT had allowed the respondents’ appeal against the notice on the basis that there was a business carried on for gain and that the operation of the holiday lettings had involved far too active an operation to constitute mainly an investment, including the need to find new occupants and provide them with services in excess of those required for ‘bare upkeep’. The services included the provision of:

1. (a) a cleaner/caretaker;
2. (b) heating and hot water;
3. (c) television and telephone;
4. (d) someone on call to deal with queries and emergencies; and
5. (e) cleaning materials and welcome pack.

There was no challenge to the FTT’s decision that there was a holiday letting business of the property carried on for gain. HMRC appealed on the basis that the business was ‘mainly’ one of holding Fairhaven as an investment and was accordingly disqualified from being relevant business property by s105(3) IHTA 1984. HMRC submitted that owning land with a view to obtaining income from it was in itself an investment activity and was thus caught by s105(3). HMRC argued that the services provided were incapable of taking the business outside the ‘investment’ category. The respondents contended that the question had been one of fact for the FTT to determine in light of the evidence before it.

Held (allowing the appeal):

1. (1) The starting point is that owning and holding land in order to obtain an income is generally to be characterised as an investment activity. Such an investment may be actively managed without losing its character as such. The fact that Fairhaven was let to holidaymakers does not detract from the point that the business was basically of an investment nature (para [42]). Business activities at Fairhaven were directed at maintaining or enhancing its capital value and obtaining a regular income. It was an income producing asset (para [43]).
2. (2) Provision of additional services is not to be regarded as part of the maintenance of a property as an investment (IRC v George [2003] WTLR 471). However, the critical question is whether these services are of a nature and extent to prevent Fairhaven from ‘mainly’ being held as an investment. In any normal case, an actively managed property will still satisfy the ‘mainly’ condition (para [45]).
3. (3) On the basis of the FTT’s primary findings of fact, the only conclusion reasonably open to it had been that the business carried on at Fairhaven was mainly that of holding property as an investment. The services provided were all of a standard nature and aimed at maximising the income obtained from the property. There is nothing to distinguish it from any other actively managed furnished letting business of a holiday property and no basis for concluding that the services preponderated to such an extent that the business ceased to be mainly of an investment nature (para [46]).
4. (4) The FTT misdirected itself on two matters which in its view would have prevented an intelligent businessman from characterising the property as an investment:
5. (i) the need constantly to find new occupants; and
6. (ii) the provision of services over and above those needed for the ‘bare upkeep’ of the property.
7. This was a misdirection because:
8. (i) the need to find new occupants is an activity that falls on the investment side of the line; and
9. (ii) ‘bare upkeep’ is far too narrow a criterion to identify management activities properly to be regarded as part of the business of holding property as an investment (paras [49]-[50]).

JUDGMENT HENDERSON J Introduction [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 …

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