Business Property Relief (BPR) applies to 'relevant business property' and acts to reduce the value of a property by up to 100%, for inheritance tax purposes. Therefore, Business Property Relief (BPR) may allow you to pass on some of your business free of tax, either during your lifetime or as part of your will.

There are a number of requirements that must be met before BPR can apply. The two key ones are:

  • The property must be a 'relevant business property' – this does not include business, carried out at the property, which has no financial gain
  • The transferor must have owned the relevant business property for the period of two years prior to the transfer.

The decision in the case of Nicolette Vivian Pawson (Deceased) v Commissioners for HMRC, which took place in November 2011, may have a direct affect on holiday property lettings' potential to qualify for BPR. The decision reached in this case put forward that a holiday property let can qualify as a relevant business property and that it will not necessarily be viewed as merely an investment. Currently, Section 105(3) of the Inheritance Tax Act (IHTA) 1984 states that if a business consists wholly or mainly of holding investments, it will be excluded from BPR.

The outcome of the case decided that an intelligent businessman would not consider the ownership of a holiday letting as an investment as it is too active a project to be considered as such.

The First-Tier Tribunal held that the letting of Mrs Pawson's rental cottage amounted to a business for two years prior to the death of Mrs Pawson. The letting to holidaymakers was classed as 'a serious undertaking earnestly pursued' stated Richard Barlow, Tribunal Judge. They also ruled that the business, although not always profitable, had been run with the purpose of achieving a gain and as such was not excluded from BPR by the provisions in s103(3) of the IHTA 1984.

This decision goes against the previous view of HM Revenue and Customs and according to Andrew Arnott of Saffery Champness "is of significant interest to landowners, farmers and indeed anyone letting a holiday property."

Partner at Hugh James solicitors, Matthew Evans commented "It is thought that HMRC had a number of similar cases that they were holding back pending the outcome of this case. We will now have to wait, with interest, to see how or if they proceed with these cases."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.