What’s the latest on Inheritance Tax for Furnished Holiday Lets?

Business property relief

Business property relief (BPR) is a valuable relief from Inheritance Tax (IHT) which applies at the rate of 100% to “relevant business property” which includes:

• property consisting of a business or interest in a business
• unquoted securities in a company of which the transferor has control
• unquoted shares in a company

But section 105(3) IHTA 1984 states that “a business or interest in a business […] are not relevant business property if the business […] consists wholly or mainly of […] making or holding investments”. 

The issue for FHL owners is that the holding of land is viewed as an investment rather than as a trade.

HMRC’s position

In the IHT manual, HMRC expresses the view 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”.

Whilst HMRC’s starting point is clear, it does not do much to help owners of FHL businesses understand with any certainty whether their businesses will qualify for BPR on their deaths.  What type of additional services are necessary?  What level of additional services is sufficient?

Recent cases

Perhaps unsurprisingly therefore, an increasing number of BPR cases related to FHLs have come before the First and Upper Tier Tax Tribunals in recent years.

In most of these cases (including Pawson [2013], Green [2015] and Ross [2017]), the tribunals have found in favour of HMRC, setting the bar for a FHL business to be considered a “trading” business particularly high.

However, the recent case of PRs of Graham v HMRC [2018] UK FTT 306 offers some hope to taxpayers.

Mrs Graham ran a business comprised of four self-catering flats from her farmhouse on the Scilly Isles.  In addition, two guest bedrooms in the main house were available for occasional use as B&B accommodation.  Mrs Graham and her daughter were heavily involved in the day-today running of the business. Following her death, Mrs Graham’s personal representatives claimed BPR.

The BPR claim was rejected by HMRC and so the claim came before the First Tier Tax Tribunal.  The main question before the Tribunal was whether the additional services provided by Mrs Graham were sufficient to tip the business from being one of wholly or mainly holding investments into that of a trading business.

The Tribunal considered in detail the additional services provided by Mrs Graham, which included:

• Use by guests of well-maintained gardens, a solar-heated outdoor pool, sauna, barbeque area, games room and laundry facilities
• Supply of fresh flowers, homemade goods, toiletries and cleaning materials for each flat
• Availability of golf buggies and bicycles for hire
• Unpacking guests’ grocery shopping orders
• Assistance with arranging events/parties such as weddings, anniversaries etc
• Purchase of fresh fish for guests’ use
• Weekly cleaning of all communal facilities including the pool

It was noted in the judgement that the activities required about 200 hours of work in a 35 week rental season.

Having looked at the business, firstly considering all the different components and then at the business as a whole, the Tribunal concluded that this was “an exceptional case which does, just, fall on the non-mainly-investment side of the line” and the BPR claim was granted.

So where does that leave owners of FHLs?

Whilst the decision of the First Tier Tribunal in the Graham case is helpful, the Tribunal made clear that it was an exceptional case. The decision is also under appeal by HMRC and so it remains to be seen whether it will be upheld by the Upper Tier Tribunal. Taxpayers should not therefore view the Graham decision as opening the door wide to numerous future successful BPR claims. Each case must be analysed carefully on its specific facts and only businesses with very significant additional services are likely to qualify for BPR.

It is therefore advisable for owners of FHL business to consider alternative planning options to reduce the level of IHT which may arise on their deaths.

As highlighted above, the CGT rules are different and so whilst a FHL business may not be considered “trading” for IHT purposes, it may still qualify for CGT business asset holdover relief.  As such, a timely lifetime gift of a FHL business may in fact be a much more favourable option than reliance on BPR.

Laura Kearns is a Private Client lawyer who advises clients on lifetime and succession planning, with a focus on associated tax issues. She has particular experience advising non-UK domiciled and non-UK resident clients in respect of their personal affairs.