R&C Commrs v. Lockyer & Anor (for Pawson Estate), [2013] UKUT 050 (Tax and Chancery Chamber)

The deceased taxpayer and her three children held equal interests in a bungalow ("Fairhaven"), which they rented out as a holiday property. The Inheritance Tax Act provided that, when the taxpayer died, she would be exempt from inheritance tax on the Fairhaven interest if it was "property consisting of a business or interest in a business," but that this exemption did not apply where the business consisted "wholly or mainly of ... making or holding investments." The estate contended that the taxpayer's active management of the business meant that the business was not mainly the holding of an investment. The taxpayer's activities included having the property maintained and cleaned, advertising, and decoration, as well as continually re-letting the property (virtually all stays were two weeks or less).

The Upper Tribunal reversed a finding by the First-tier Tribunal that the investment business exclusion did not apply. As the taxpayer's interest thus represented an investment business, it was subject to inheritance tax. Henderson J. stated (at para. 42):

...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 characterized 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....Accordingly, the fact that the Pawsons carried on an active business of letting Fairhaven to holidaymakers does not detract from the point that, to this extent at least, the business was basically one of an investment nature.

Although the providing of "additional services" such as the provision of a cleaner, heating and hot water, television and telephone, and being on call to deal with emergencies, were not part of the maintenance of the property as an investment:

The critical question, however, is whether these services were of such a nature and extent that they prevented the business from being mainly one of holding Fairhaven as an investment. (para. 45)

The answer was negative (at para 46):

[T]here was...nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and certainly no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature.

The deceased taxpayer and her three children held equal interests in a bungalow ("Fairhaven"), which they rented out as a holiday property. The Inheritance Tax Act provided that, when the taxpayer died, she would be exempt from inheritance tax on the Fairhaven interest if it was "property consisting of a business or interest in a business," but that this exemption did not apply where the business consisted "wholly or mainly of ... making or holding investments." The estate contended that the taxpayer's active management of the business meant that the business was not mainly the holding of an investment. The taxpayer's activities included having the property maintained and cleaned, advertising, and decoration, as well as continually re-letting the property (virtually all stays were two weeks or less).

The Upper Tribunal reversed a finding by the First-tier Tribunal that the investment business exclusion did not apply. As the taxpayer's interest thus represented an investment business, it was subject to inheritance tax. Henderson J. stated (at para. 42):

...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 characterized 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....Accordingly, the fact that the Pawsons carried on an active business of letting Fairhaven to holidaymakers does not detract from the point that, to this extent at least, the business was basically one of an investment nature.

Although the providing of "additional services" such as the provision of a cleaner, heating and hot water, television and telephone, and being on call to deal with emergencies, were not part of the maintenance of the property as an investment:

The critical question, however, is whether these services were of such a nature and extent that they prevented the business from being mainly one of holding Fairhaven as an investment. (para. 45)

The answer was negative (at para 46):

[T]here was...nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and certainly no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature.