The Tanner case is the latest in a long line of cases where the application of IHT business relief in the context of let properties has been considered, says Gerry Brown, trust and estate planning consultant at QB Partners.
Ms Gertrude Tanner died on 17 September 2017. Her estate included a holiday accommodation business.
At the time of her death, there were five active self-catering holiday letting units in Sandsend, near Whitby valued at £2,040,000. She also owned a two bedroom house nearby, valued at £230,000. Planning permission had been obtained to turn it into self-catering accommodation but conversion work had not been completed at the time of Mrs Tanner’s death.
Her executors claimed inheritance tax (IHT) business relief in respect of the business. Business relief is available where the value transferred on a transfer of value (in this case death) is attributable to property consisting of a business or an interest in a business. There will be 100% tax relief on the business assets unless the business consists “wholly or mainly” of “making or holding investments”.
Did Mrs Tanner’s business consist wholly or mainly of making or holding investments?
The let properties were available for up to three weeks at a time. In the high season the properties could only be booked in weekly blocks, but at other times they were available for shorter periods. Changeover days were principally on Mondays and Fridays.
The business undertook housekeeping and cleaning services. These were primarily undertaken on the ‘changeover’ days when customers left in the morning and new customers arrived in the afternoon. There was usually a six-hour window between departures and arrivals.
In addition to the cleaning and tidying, before customers arrived staff would turn on lamps, adjust heating and light fires. The radio was set to play Classic FM.
With lets in excess of a week, the house would be cleaned on the seventh day of the stay. Additional cleaning services were offered, at an extra charge, where customers requested this. Linen and towels were provided in each property.
The properties were well maintained, and were redecorated on a regular basis. They had well-kept gardens. Each property was provided with teas, coffee, milk and sugar, eggs, the local newspaper, a weekly weather forecast and tide timetable. Homemade scones with jam and butter were also provided.
Tourist information brochures and leaflets were provided including information about local amenities, walks and transport facilities. Manuals for equipment in the house were also provided and advice was given as to what to do in an emergency.
HMRC would not accept the executors’ claim to relief and the matter was referred to the Tax Tribunal.
The Tribunal judge reviewed the law;
“What amounts to a business of “making or holding investments” is not set out in statute … the starting point when considering whether or not a business such as this qualifies for relief is “that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity … such an investment could be actively managed without losing its essential character as an investment.”
The judge reviewed the activities of the business;
“Bearing all of this in mind, in the context of case law which is binding upon us, we have concluded that none of these factors, viewed individually, are sufficient to take the business over the non-investment line. Looking at the factors in the round, together, we reach the same conclusion. We consider that, looked at as a whole, this business primarily provides accommodation to customers. Any additional elements are ancillary to the accommodation or insufficient to render the business one which is non-investment even if the time involved is significant.
“We consider that the customers are buying the use of a property in which they could stay and use as their own, not purchasing a wider package of services which outweighs the provision of a place to stay.
“In conclusion, we find that this business viewed as a whole is mainly one of holding investments. Whilst it may operate to a high standard and is clearly a well-managed business, when the entire business is considered in the round we find that the non-investment activities involved are not sufficient for it to fall on the non-investment side of the line.”
HMRC has been ‘successful’ in the vast majority of this long line of cases where the application of IHT business relief in the context of let properties has been considered.
Advisers will want to tell clients owning let property of the difficulty in obtaining business relief and develop IHT different planning strategies in the light of this restriction.
By Gerry Brown, trust and estate planning consultant at QB Partners
