Pawson: Upper Tribunal rules against the taxpayer on holiday lettings

Hotly debated and long-awaited, the Upper Tribunal decision in the Pawson case has been published. And it is not good news for the taxpayer. The Tribunal found that the deceased’s holiday bungalow had been held “mainly as an investment”. As a result, business property relief from inheritance tax was not available.

Background

Mrs Pawson owned a ¼ share in Fairhaven, a large bungalow overlooking the sea on the Suffolk coast. Her three children owned the rest between them. For more than two years before her death the bungalow had been let as a holiday cottage.

Following Mrs Pawson’s death, her executors claimed that her share in the holiday cottage consisted of “a business or interest in a business” and was “relevant business property” under s103 (1)(a) of the Inheritance Tax Act 1984. As such, it was eligible for business property relief against the inheritance tax that would otherwise have been due.

HMRC disputed this and argued that Mrs Pawson’s share in the holiday bungalow did not qualify as relevant business property because – if it was a business at all (they initially disputed this) – it was a business that consisted mainly of holding investments.

At Issue

The main question considered by the both the First and Upper Tribunal boiled down to this:

Was the holiday letting business in which Mrs Pawson had an interest a business which consisted mainly of holding investments?

If it was, then the property was disqualified from being relevant business property by s105 (3) of the Inheritance Tax Act 1984, which says:

“A business or an interest in a business … are not relevant business property if the business … consists wholly or mainly of … making or holding investments.”

Decision