Business Property Relief (BPR) & Furnished Holiday Lets (FHL)

Furnished Holiday Lets & Business Property Relief - A Landlords Introduction

There are some odd beasts on this planet. But in the tax world, there is probably nothing so odd as the Furnished Holiday Let or FHL.

A FHL is for all intent and purposes an investment. However, if one meets the conditions dictated by our noble tax legislation then it is transmogrified in to a trade. A consequence of this is that it potentially qualifies for the same kinds of relief that a trading business does. One such relief is business property relief.

Does HMRC like this? HMRC does not.

This article concentrates on the availability of business property relief for FHLs.

Business Property Relief (BPR) - a reminder

Business property relief is a highly attractive relief from Inheritance Tax which applies at a headline rate of 100% to relevant business property, including:

• 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

The Usual Carve Out...

However, the legislation sets out that:

 “a business or interest in a business… [is] not relevant business property if the business… [it]… consists wholly or mainly of…[the] making or holding investments”.  

As such, the common or garden property investor is sent packing.

However, the position for someone who is the owner of a FHL is potentially more nuanced.

HMRC’s Manuals, FHL & BPR

In its manuals, HMRC sets out its 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”

So what type and level of additional services are necessary?

This is the million dollar question and one must analyse the relevant case law to tease out the detail.

General Case Law, BPR & FHL

In conjunction with caravan parks, FHL cases form a sizeable proportion of case law in relation to BPR.

Sadly, in most cases - e.g. Pawson, Green and Ross - the Tribunals have found against the taxpayer. The bar in terms of additional services being set quite high.

Yet do not despair.

The Personal Representative of Graham v HMRC

Background

In the recent case of Personal Representatives of Graham v HMRC it was held by the Tribunal that the activities fell on the right line to obtain business property relief.

The key points in the case were as follows:

• The taxpayer ran a business comprised of four self-catering flats from her farmhouse on the Isles of Scilly.
• In addition, there were two guest bedrooms in the main house that were available for occasional use as B&B accommodation.
• The taxpayer and her daughter were heavily involved in the day-to-day running of the business.

Following her death, the taxpayer’s personal representatives made a claim for business property relief on the assets of the business.

HMRC duly rejected the claim. As such, the personal representatives appealed to the First Tier Tax Tribunal (“FTT”).

The key question was whether the ‘additional services’ provided were enought to shift the business from being ‘one of wholly or mainly holding investments’ to a trading business.

Additional Services

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

• The guests could enjoy and use the gardens
• There was a solar-heated outdoor pool
• There were other facilities such as a sauna, barbeque area, games room and laundry facilities
• Fresh flowers were supplied as were toiletries and cleaning materials
• It was possible to hire golf buggies and bikes
• The taxpayer provided help with arranging events such as wedding and other parties
• The communal facilities, including the pool, were cleaned weekly

Someone seemingly crunched the numbers and it was decided that the activities required c200 hours of work in a 35 week rental period.

Looking at the business in the round, the tribunal decided that it qualified for BPR.

Conclusion

Despite the Graham case, FHL owners should perhaps view non-qualification for BPR as the general rule unless significant additional services are provided.

As such, owners of FHLs should consider carefully their IHT position and, in most cases, progress on the basis that no business property relief is available.

One should not conflate the problems with BPR with other reliefs. For instance, whilst a FHL business may not be “trading” for IHT purposes, it may still qualify for CGT tax reliefs.

If you have any queries about Business Property Relief Furnished Holiday Lets, or business property relief in general, then please get in touch.

Business Property Relief Furnished Holiday Lets was last updated on 12 November 2019.