Business Property Relief (“BPR”) and Serviced Apartments: Crumbs of comfort or crumbs in the bed?

Introduction

Aah yes, a Business Property Relief (“BPR”) case.

It must be either Furnished Holiday Lettings or Caravan Parks, I hear you ask.

Well, not a million miles away. Here, in respect of the case of Bruce Firth and another v HMRC (“Firth”), we are talking about serviced apartments or, more grandly, aparthotels.

Property activities – To BPR or not BPR?

BPR is potentially a very attractive relief if a taxpayer can claim it. Potentially, it provides for a person to obtain a 100% exemption from IHT on death, and also in respect lifetime transfers.

Broadly speaking, in order to satisfy the legislation, the activities must be trading in nature. In addition, some otherwise trading activities are specifically excluded.

It has long been accepted that all property letting businesses will sit somewhere on a spectrum for BPR purposes. The key (forgive the pun) question is which side of the BPR ‘line’ do particular activities sit

At the trading end, and therefore qualifying for BPR qualifying, we have businesses where the weight of additional services provided takes us beyond the typical property letting activity. For example, a luxury hotel with a bar, restaurant, fitness centre, concierge and a host of other guest services and facilities.

At the other end sit businesses that are mainly of an investment. For example, a house let on an Assured Shorthold tenancy. This will not qualify for BPR.

Disputes of this nature are largely centre on placing the activities on one side of the line or the other.  Clearly, it is generally the taxpayer arguing they are mainly trading and HMRC arguing tht the activities are mainly of an investment nature.

Unfortunately, many recent cases have seen HMRC triumph. This might simply be an indication that HMRC picks the cases it litigates very carefully.  

Brucie non-bonus

In Firth, the First-tier tax Tribunal considered whether BPR was available on some serviced apartments (“aparthotels”).

BPR on the facts of the case was disallowed. This was on the basis that the business was mainly of an investment nature.

The case specifically concerned a business which owned four properties in York and Harrogate. The business made these properties available to the public as services apartments, a burgeoning sector.

Three of the buildings had manned receptions, one had a conference room and one a café at the relevant time. The business described itself as:

“combin[ing] the comfort and quality of a luxury hotel with the space and flexibility of a well-equipped apartment”

Drawing the line

The Tribunal considered that the following activities fell on the investment side of the line:

• marketing,
• benchmarking,
• pricing,
• bookings,
• making the apartments ready for guests,
• dealing with complaints and requests,
• maintenance,
• repairs,
• insurance, and
• business rates

On the other hand, it determined that the following activities were indicative of trading activities:

• welcome packs,
• the provision of cleaning if requested,
• linen,
• towels,
• shower gel,
• furniture,
• white goods,
• DVD players and TVs,
• Wi-Fi,
• food and the ability to purchase extra packages

My own view is this is a somewhat, and perhaps overly, mechanistic approach.

Quality of evidence

Perhaps of overwhelming importance was the quality of the evidence provided by the taxpayer:

“…although we had a plethora of information, much of it was bald assertion…unsupported by contemporaneous documentation.”

Further, the tribunal was clearly concerned about the “surprisingly little” financial information supplied to them and the fact that, in evidence, the general manager was in its view “over-egging” the position (he had suggested that the business was comparable to Hotel du Vin and Malmaison).

As such, the tribunal’s decision was that the business was on the investment side of the spectrum and BPR was therefore unavailable.

Any crumbs from the table… or merely crumbs in the bed?

There were some crumbs of hope, however.

Importantly, the tribunal accepted that some aparthotels would fall on the right side of the line and qualify for BPR.

TheTribunal Judge even named a particular provider of aparthotels where she had stayed that would qualify for BPR.

A most unusual clearance process!

Next steps

If you have any queries at all regarding the topics in this signpost then please do get in touch.