Anthony Nixon considers the latest case on IHT business property relief, Executors of Tanner v HMRC, and, despite judgment for the Revenue, finds support for his view that the law has taken a wrong turning on what is barred from relief as “mainly investment.” He also notes some strictures from the Court of Appeal on judicial interpretation of statutes. But it is going to need a brave taxpayer, with a strong case, to set things right.
Business property relief and the investment restriction
Section 105 of the Inheritance Tax Act 1984 defines what does and what does not qualify for inheritance tax business relief (defined as “relevant business property”). Section 105(3) includes the critical restriction that business assets, “are not relevant business property if the business … consists wholly or mainly of … making or holding investments”.
As my profile on my firm’s website mentions, I advised the executors (behind the scenes) in Graham v HMRC [2018] UKFTT 306 (TC). This remains the only reported case in which taxpayers have obtained business property relief for holiday lettings, against HMRC’s (mostly successful) arguments that these businesses are mainly investment.
The Tanner case
The latest case won by HMRC (Executors of Tanner v HMRC [2025] UKFTT 328 (TC)) is both remarkable and not remarkable. It is unremarkable, because the First Tier Tribunal felt itself bound by the Pawson decision (of which more below) to decide that Miss Tanner’s holiday business was mainly investment. But it is remarkable, in that lay judge John Woodman, who sat with lawyer chair Anne Fairpo, contributed the following:
99. The non-legal member would like it to be noted that this decision is reached with some regret because it does appear that case law on this aspect of business property relief has strayed from the apparent purpose of the underlying legislation, to support the continuation of genuine business activity whilst withholding relief from property held for purposes of long-term capital benefit. However, this is something which can only be dealt with by the higher courts or Parliament: as noted earlier this Tribunal is bound by the decision of the Upper Tribunal in Pawson.
All or nothing
A major problem with the investment restriction is that it is black and white. Either, a business is mainly investment and so gets no relief; or it is not, and its entire value (in most cases) is free of IHT. As readers will know, 100% relief is to be capped from April 2026.
HMRC’s IHT Manual – a changing approach
HMRC have changed their approach over the years. 20 years ago, IHTM25278 read as follows (I call this Version 1):
The HMRC Solicitor has advised the office that in some instances the distinction between a business of furnished holiday lettings and, say, a business running a hotel or a motel may be so minimal that the Courts would not regard such a business as one of ‘wholly or mainly holding investments’ for the purposes of Section 105(3) IHTA 1984.
You should therefore normally allow relief where:
- the lettings are short term (for example, weekly or fortnightly); and
- the owner – either himself or through an agent such as a relative or housekeeper – was substantially involved with the holidaymaker(s) in terms of their activities on and from the premises.
Some years later, HMRC revised IHTM25278, repeating what was said about their past approach in a slightly revised form of these two bullet points, and continuing (Version 2):
Recent advice from Solicitor’s Office has caused us to reconsider our approach and it may well be that some cases what might have previously qualified should not have done so. In particular we will be looking more closely at the level and type of services, rather than who provided them.
Today, IHTM25278 reads (Version 3):
HMRC’s view is that furnished holiday lets will in general not qualify for business property relief. The income derived from such businesses will largely consist of rent in return for the occupation of property. There may however be cases where the level of additional services provided is so high that the activity can be considered as non-investment, and each case needs to be treated on its own facts.
Since land and buildings account for much of the value of almost any owner-occupier business, it is, perhaps, understandable that HMRC want to maximise the tax they can collect by denying business relief to more and more cases. But is Version 3 what Parliament intended in section 105(3)? Judge Woodman seems to agree with me in thinking that the answer is “No”.
What is the right approach?
In McCall v HMRC [2009] STC 990 (a decision of the Northern Ireland Court of Appeal) Deeny J commented:
…if one applies the maxim noscitur a sociis then one can see the possibility that Parliament intended a business more akin to one dealing in and holding securities, shares or properties in a portfolio to be excluded from this form of business relief rather than, as here, the management by a widow of a single farm business…
If Deeny J is right, this would lead to an even narrower interpretation of the investment restriction than IHTM25278’s Version 1.
In fact, I don’t think many of us who practise in this area have much problem with Version 1. To my eyes, it reflects what would be the view of an intelligent businessman (who crops up in a lot of the case law). It also matches what an accountant friend told me, years ago, about a common reaction to her recommending the tax advantages of holiday lettings: the usual response was that it would be too much work. And it is strikingly similar to Judge Woodman’s distinction between “the continuation of genuine business activity” and “property held for purposes of long term capital benefit.”
Pawson
I have not been able to work out the exact dates when HMRC changed Version 1 of IHTM25278 to Version 2 and then to Version 3; but Version 2 must be roughly contemporary with HMRC arguing the case which has subsequently become known as Pawson (Lockyer v HMRC [2013] UKUT 050 (TCC)). Version 3 follows Henderson J’s judgment in HMRC’s favour for which Briggs LJ ([2013] EWCA Civ 1864) refused leave to appeal.
On the criteria in Version 1, perhaps HMRC should have won Pawson at the FTT? Mrs Pawson had only a 25% share in what had historically been a family holiday home and, in recent years, took no active part in the lettings; there is an arguable case that, for her, this was an investment.
Normal and typical
I have a problem with paragraph 46 of Henderson J’s UT judgment in Pawson:
I am unable to accept Mr Gordon’s [Keith Gordon, representing the taxpayer] submission that a holiday letting business is inherently of such a nature that it falls outside the scope of a “normal” property letting business … On the contrary, I consider such a business to be a typical example of a property letting business, albeit one of a fairly specialist nature.
I disagree; I think that a business “of a fairly specialist nature” makes a particularly bad example; it is not “typical”.
In refusing leave for Mrs Pawson’s executors to appeal from the UT, Briggs LJ said, wrongly, that Henderson J described Mrs Pawson’s business “as a fairly typical holiday lettings business.” He didn’t. I fear that Briggs LJ did not give sufficient consideration to the authorities, none of which were about holiday lettings.
The intelligent businessman
In his UT judgment Henderson J continued:
48. … the first reason which the FTT give for saying that an intelligent businessman would not regard the ownership of a holiday letting property “as an investment as such” is that he “would regard it as involving far too active an operation for it to come under that heading”. But it is well established that an investment business may be actively managed. The relevant test is not the degree or level of activity, but rather the nature of the activities which are carried out.
Yes, of course, a business may be actively managed, and still be mainly investment. The Court of Appeal, in the leading IHT case on what is and is not mainly investment (IRC v George [2004] STC 147), confirmed this, approving the Special Commissioner’s findings in Martin v HMRC [1995] STC (SCD) 5. But Martin was about a business park, letting units for three year terms, while George considered which activities were investment and which non-investment aspects of a static caravan park and its related activities. Neither case was about holiday lettings for a week or two at a time.
While the nature of the activities carried out is, of course, relevant, how can the degree or level of activity not be? To me, arranging bookings for holiday accommodation is sales, not investment. I think the “intelligent businessman” would agree.
Henderson J considered, in his paragraph 49, that the FTT made a “significant error of law” in finding that “the need constantly to find new occupants” was “on any view an activity which falls on the investment side of the line”. I have great difficulty with this conclusion. I think the judge was mistakenly adopting conclusions from earlier cases with very different facts.
The starting point and the spectrum
Carnwath LJ’s judgment in George is also the source of Henderson J’s (to my eyes unfortunate) words, “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 characterised as an investment activity.”
In George the equivalent words were qualified:
12. Although it is common ground that the exploitation of a proprietary interest in land for profit is in principle an ‘investment’ activity, I would agree respectfully with the commissioner’s comment as to the wide ‘spectrum’ involved.
Carnwath LJ continued by quoting from the special commissioner in George:
There is a spectrum at one end of which is the exploitation of land by granting a tenancy …. At the other end of the spectrum, while land is still being exploited, the element of services means that there is a trade, such as running a hotel, or a shop from premises owned by the trader.
I have already quoted Version 1 of IHTM25278: “the distinction between a business of furnished holiday lettings and, say, a business running a hotel or a motel may be … minimal”. If running a hotel is at “the other end of the spectrum” it strikes me that a minimally different holiday letting business is unlikely to be investment.
Some conclusions
I think it unlikely that Carnwath LJ would have agreed with Henderson J that, in an actively managed holiday business, where the business owner lives on site and provides a wealth of services, arranging new bookings is “an activity which falls on the investment side of the line.”
I continue to agree with Judge Woodman in Tanner that the law “has strayed from the apparent purpose of the underlying legislation.” While I know nothing about his career, is not Judge Woodman exactly the intelligent businessman?
The problem is that it is now going to take a very courageous taxpayer, with a strong, well-argued case, to defeat HMRC on this issue. That case will have to go to the Court of Appeal; perhaps, even to the Supreme Court.
It is a pity that the Court of Appeal did not consider Pawson. Like Pawson, George was a case where the fact-finding tribunal’s decision was overturned (in that case in the High Court); in George Carnwath LJ, restoring the original decision, said:
58… I think, with respect to the [High Court] judge, that he placed too much reliance on the particular formulations used in [two earlier cases], instead of concentrating on the language of the statute.
The future president of the Supreme Court, then Hale LJ, agreed:
63… It is usually unfortunate to try to gloss clear statutory language with additional judicial tests.
If you would like any advice regarding business property relief, or indeed have any other inheritance tax query please do get in touch with Anthony Nixon.
Anthony’s article was recently published in The Tax Journal.
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