HMRC v Personal Representatives of Nicolette Pawson

Factual and Procedural Background

The deceased, referred to as the Decedent, owned a 25% beneficial interest in a seaside bungalow known as "Fairhaven," with the remaining 75% held equally by her three children, two of whom acted as executors of her estate. The executors claimed that the Decedent's share qualified for 100% inheritance tax relief as relevant business property under the Inheritance Tax Act 1984 ("IHTA 1984"), on the basis that the property was used in a holiday letting business carried on for profit during the two years preceding the Decedent's death. The relief claim was rejected by the tax authorities ("The Tax Authority"), who determined that the property did not constitute relevant business property. The executors appealed this determination to the First-tier Tribunal (Tax Chamber) ("FTT"), which allowed the appeal, finding that a business was carried on and that it was not mainly a business of holding investments.

The Tax Authority appealed to the Upper Tribunal (Tax and Chancery Chamber) ("UT") with permission limited to a single point of law concerning whether the FTT applied the correct legal test in determining if the business was mainly one of holding investments. The appeal focused on whether the holiday letting business was, in law, an investment business disqualifying it from relief.

Legal Issues Presented

1. Whether the FTT erred in law in its approach to determining if the holiday letting business was mainly a business of holding investments under section 105(3) of the IHTA 1984.

Arguments of the Parties

Appellant's Arguments (The Tax Authority)

• The business of owning land to obtain income is inherently an investment activity caught by section 105(3) of the IHTA 1984.
• The FTT should have applied the three-fold categorisation from Martin v IRC, distinguishing between activities that make investments, compliance activities, and management activities, with only the provision of additional services potentially affecting the classification.
• The services provided in the holiday letting business were standard, incidental, and insufficient to take the business outside the investment category.
• The FTT erred by focusing on the level of activity rather than the nature of the activities, misunderstanding the legal test.
• The FTT's conclusion that an intelligent businessman would not regard the property as an investment was legally flawed because active management does not exclude an investment classification.
• The FTT misapplied the "bare upkeep" standard to distinguish investment activities from service provision, which was too narrow and legally incorrect.
• On the facts found by the FTT, the only reasonable conclusion was that the business was mainly one of holding investments, warranting dismissal of the relief claim.

Respondents' Arguments (The Executors)

• The FTT was entitled to find that the business was not mainly one of holding investments based on the evidence and the nature of the services provided.
• The test applied by the FTT, focusing on how an intelligent businessman would regard the business, was consistent with established authority.
• A substantial part of the business consisted of providing services to holidaymakers that were not investment-related.
• The facts placed the business closer to the non-investment end of the spectrum, akin to the position in IRC v George.
• The fact that services were included in the rent charged was immaterial to the classification.
• The "mainly" criterion is qualitative, and the FTT properly applied it in concluding the business was not mainly an investment business.

Table of Precedents Cited

Court's Reasoning and Analysis

The Upper Tribunal began by accepting the FTT's factual findings that a holiday letting business was carried on at the property for gain and that the business was not wholly one of holding investments. The legal issue was whether the FTT applied the correct legal test to determine whether the business was mainly one of holding investments under section 105(3) of the IHTA 1984.

The Tribunal reviewed relevant statutory provisions and authoritative case law, emphasizing that the statutory test is qualitative and fact-dependent. It acknowledged that owning and letting land to obtain income is generally an investment activity, and that active management and maintenance do not remove the investment character. The Tribunal accepted the three-fold classification from Martin v IRC, distinguishing between making investments, compliance activities, and management activities, with the provision of additional services potentially affecting classification.

The Tribunal noted that the FTT had correctly identified the law but had erred in applying it. The FTT focused on the level of activity and services provided, concluding that these services took the business outside the investment category. The Upper Tribunal found this approach legally mistaken because the nature of the activities, not their intensity, determines classification. The services provided—cleaning, heating, provision of television and telephone, caretaker duties, and minor replenishments—were standard for a furnished holiday letting and were insufficient to change the business's fundamental nature.

The Tribunal found that the FTT misunderstood the "bare upkeep" standard, treating it too narrowly. It held that the need to find occupants is an investment activity and that maintenance and management activities are part of holding an investment. The Tribunal concluded that the only reasonable legal conclusion on the facts was that the business was mainly one of holding investments, and thus the FTT's decision was legally unsustainable under the Edwards v Bairstow standard.

Holding and Implications

The Upper Tribunal ALLOWED the appeal by the Tax Authority.

The effect of the decision is to reinstate the original determination denying inheritance tax relief on the Decedent's 25% share in the property, on the basis that the holiday letting business was mainly one of holding investments and therefore disqualified from relief under section 105(3) of the IHTA 1984. The decision clarifies that actively managed holiday letting businesses with standard ancillary services will generally be regarded as investment businesses for inheritance tax purposes. No new precedent was established beyond the application of existing principles to the facts.