Analysis
The appeal was brought by Mr and Mrs Firth in their capacity as trustees of the L. Batley 1984 Settlement (the trust) against notices of determination issued to the trustees by HMRC on 7 September 2018, which refused Inheritance Tax (IHT) Business Property Relief (BPR) on the grounds that the interest of the trustees in the business carried on by the Lawrance (Hotel Living) Ltd (The Lawrance) consisted mainly in the holding of investments and was therefore not a qualifying business for the purposes of BPR.
On 14 November 1984 Lawrance Batley established the trust. Prior to 2012 the trust had been a 31.39% shareholder in L. Batley Holdings Ltd (LBHL), a holding company for a number of companies, the principal activities of which were the investment of cash reserves generating interest and dividends and targeting capital growth, property investment, and the provision of serviced apartments. In 2005 LBHL purchased a number of residential properties in Harrogate with the intention that the properties would form part of LBHL’s investment portfolio and would be leased on assured shorthold tenancies, but the idea evolved into an apart-hotel, ie, the provision of serviced apartments.
On 2 October 2012 KPMG wrote to HMRC seeking clearance for a proposed transaction, which was to separate the serviced apartment trading activities, operating under the brand ‘The Lawrance’, from the core investment business. The intention was to separate that trade with a more aggressive risk profile from the lower risk core investment business. The trading activities of The Lawrance extended to three properties in Harrogate and a property in York.
It was never disputed that The Lawrance was carrying on a business, but the type of business carried on by The Lawrance was not of a type previously considered by the courts and tribunals. By a letter dated 23 May 2018 HMRC accepted that the nature of the business was that of an apart-hotel and not furnished holiday letting. HMRC’s argument was that the business was primarily that of the provision of self-contained short-term rental accommodation.
The sole issue in the appeal was whether The Lawrance was a qualifying business for the purposes of BPR. The burden of proof was with the appellants to displace the notices by satisfying the tribunal on the balance of probabilities that at the relevant date the business was not one of mainly holding investments.
The tribunal considered on the evidence whether the real nature of the business was investment in land with ancillary services, or a service business with an ancillary investment in land.
Held (dismissing the appeal):
The tribunal agreed with Judge Short in Executors of the Estate of Marjorie Ross v HMRC [2017] that the test was a ‘qualitative test of the nature of the business, not merely a quantitative test about the extent of the activities carried out by those who run it’. The tribunal had difficulties with both quality and quantity.
The tribunal did not accept the argument that The Lawrance competed with three to five-star hotels and found that the apartments were micro-lets. The evidence that customers could not choose the location of the apartment pointed to the management of an investment and not a focus on customer service.
The tribunal found that an intelligent businessman reading the arrival information and T&Cs would find that The Lawrance was maximising its return from its significant investment in four valuable properties.
In summary, the tribunal found that on the investment side of the spectrum were the activities such as marketing, benchmarking, pricing, bookings, making the apartments ready for guests, dealing with complaints and requests, maintenance, repairs, insurance, and business rates. On the non-investment side of the spectrum were the welcome pack, the provision of cleaning if requested, linen, towels, shower gel, furniture, white goods, DVD player and TV, Wi-Fi, food and the ability to purchase extra packages. Looked at in the round, the non-investment activities did not take the business over the line into the non-investment side of the spectrum.
For all of these reasons the appeal failed. The Lawrance was not relevant business property in terms of the Inheritance Tax Act 1984.
JUDGMENT TRIBUNAL JUDGE ANNE SCOTT: Introduction [1] This appeal is brought by Mr and Mrs Firth, the appellants, in their capacity as Trustees of the Batley 1984 Settlement (‘the Trust’) (also known to HMRC as the Lawrence Batley 1984 Settlement). [2] The Trustees appeal against Notices of Determination (‘the Notices’) issued to the Trustees by …Continue reading "Firth & anr v Commissioners for HMRC [2022] WTLR 1297"