Inheritance Tax: two recent cases shed new light on Pawson
Section 105(3) of the Inheritance Tax Act 1984 provides that Business Property Relief (‘BPR’) is effectively lost where a company is found to be wholly or mainly operating as an ‘investment company’. The tax cost of not obtaining BPR can be significant and it is for this reason that the question of whether a business is wholly or mainly an investment business has probably led to more case law than any other single Inheritance tax issue. Two new cases have considered the question of what is necessary to show a business is trading so as to qualify for BPR, rather than operating as an investment company.
The Vigne Case
One of the most recent cases to go through the courts is that of the Personal Representatives of the Estate of MW Vigne Deceased v HMRC  UKFTT 632 (TC) which involved a 30 acre livery business in Buckinghamshire. The late Mrs Vigne died on 29 May 2012 and her executors submitted an IHT return that included a claim for BPR on the full value of her livery business.
HMRC argued that the claim for BPR should be disallowed because the deceased’s livery business comprised nothing more than a landowner letting or licencing her land for the use of others (the horse owners), with the result that it could be characterised as an investment company.
Mrs Vigne’s executors argued that HMRC’s analysis was incorrect on the basis that the deceased’s livery business offered significantly more than a simple right to occupy particular parcels of land and went well beyond what would be expected at the lower end of livery provision. Instead, the livery business also offered valuable services for the benefit of horse-owners such as:
- the provision of worming products, including administering them on a quarterly basis
- providing horses with feed during the winter months, when the grass might not provide sufficient food
- removing horse manure from the fields, and
- undertaking a daily check on the general health of each horse.
Interestingly, the Tribunal appeared to question the approach taken in the case of HMRC v Pawson  UKUT 50 in which the judge had suggested that the correct approach was to start with the idea that a business is one of making or holding investments and then to look for factors that might alter that preliminary view. In the Vigne case, the Tribunal considered that this approach transposed the correct statutory test, which was to make no assumption whatsoever and instead establish the facts and then determine whether, taken together, they indicate that the business is wholly or mainly trading.
Taking the above into account the Tribunal accepted the executors’ arguments and found that no properly informed observer could or would have said that Mrs Vigne was in the business of ‘holding investments’ and the level of services offered were ‘incompatible with the business of holding investments’.
Although the Tribunal found in favour of the taxpayer it would be premature to expect there to be a significant shift in HHRC’s policy following this decision. The circumstances of the case were relatively unique and it should be remembered that the decision was only at First Tax Tier Tribunal level.
The Ross Case
The Vigne case covers similar considerations to those that can be found in another recent case, the Executors of Marjorie Ross deceased v HMRC 2017 UKFTT 0507 (TC), which focussed on the level of services needed for a furnished holiday lettings (‘FHL’) business to qualify for BPR.
In that case Mrs Ross had an interest in a partnership (known as the Green Door Cottages Partnership) which owned eight holiday cottages, two flats in Cornwall and a separate property in Dorset. In exchange for a fee of 14% of the partnership’s annual turnover, a local hotel in Cornwall agreed to provide services to guests of the furnished holiday lets. These services included administration (including handling bookings), personal guest services (e.g. turning up heating, accepting left luggage and answering queries), food services (delivery of bar meals and discounts on bar meals in the hotel) and ordering milk and newspapers. The executors argued that the business provided services ‘more akin to a hotel’ and as a result should qualify for BPR.
HMRC accepted that the level of services being provided was higher than in other FHL cases, but still rejected the claim for BPR, because what was ‘really being provided is land, or the right to rent land in a particularly attractive location in Cornwall and that is the main reason why people stay at these properties’.
The Ross case is the latest in a string of FHL cases (including Pawson, and Green) that have gone against the taxpayer. Indeed, following the Ross case it is very hard to see what more FHL owners could possibly do for holidaymakers in terms of providing additional services in order to qualify for BPR. It seems odd that FHL are treated so harshly and it is clear that there is a real reluctance from the courts to approve BPR claims in that context. It may be that the Ross case is successfully appealed, but until such time it should be assumed that FHL businesses are unlikely to attract BPR and other strategies should be looked at, such as whether it is possible to bring FHL under the umbrella of another trading business, without tipping the overall trading balance the wrong way.