Mark McLaughlin looks at furnished holiday lettings in the context of inheritance tax business property relief.
Business property relief (BPR) is a valuable inheritance tax (IHT) relief, which is available to business owners if certain conditions are satisfied. The relief applies to ‘relevant business property’, including a business or interest in the business, and unquoted shares in a company. The rate of BPR available for those particular categories is 100%.
However, there is an exclusion from BPR (subject to certain limited exceptions) if the business or the business carried on by the company, consists wholly or mainly of (among other things) making or holding investments (IHTA 1984, s 105(3)).
The ‘investment’ exclusions
These investment business exclusions from BPR can sometimes be difficult to distinguish from qualifying business activities. For example, a hotel business has generally been recognised as a business activity that would qualify for BPR. However, what about furnished holiday lettings – does that activity amount to a ‘business’? If so, is it an excluded business of ‘holding investments’?
In Lockyer and Robertson (Personal representatives of Pawson) v Revenue and Customs  UKUT 050 (‘Pawson’), the deceased had an interest in a large bungalow, which was operated as a holiday lettings business. It was held that the business carried on was mainly that of holding the property as an investment. The services provided to guests were not sufficient to prevent the business from being mainly investment in nature.
Similarly, in Green v Revenue and Customs  UKFTT 334 (TC), interests in a furnished holiday lettings business comprising five units of self-contained holiday accommodation in a property were held not to be eligible for BPR, as the ‘non-investment’ services provided (i.e. electricity, a welcome pack, the provision of linen, towels, furniture, equipment, wi-fi and cleaning) were insufficient to demonstrate that the business was other than mainly one of holding the property as an investment.
High hurdle of services
If the services provided in Pawson and Green were not sufficient to change the investment nature of those businesses, what level would be sufficient in other cases? A further attempt to secure BPR on a holiday lettings business was subsequently considered in Executors of the Estate of Marjorie Ross (Deceased) v Revenue and Customs  UKFTT 507 (TC).
In that case, the deceased (R) had held a share in a partnership that owned eight holiday cottages and two staff flats (‘Green Door Cottages’), and a property in Weymouth. The eight cottages were rented out as holiday cottages. The Weymouth property was also rented out as holiday accommodation. R had also owned a nearby hotel with her husband. The hotel was sold in January 2002, after which the new owner agreed to provide certain services to Green Door Cottages guests.
The First-tier Tribunal found that the services provided by the partnership to its guests were above the standard level of services for self-catering cottages, especially access to the hotel, the availability of a resident on-site caretaker and the manager’s personal presence to welcome guests and ensure that they had everything required for a happy holiday.
Unfortunately, whilst accepting that the level of services provided by the partnership was more extensive than in Green, the tribunal agreed with HM Revenue and Customs (HMRC) that however high the standard of services provided, and whatever the level of expenditure incurred on those services, what guests at Green Door Cottages really wanted was access to their own property. The essence of that was the right to rent one of the cottages for a specific period. The tribunal concluded that this was an activity which consisted mainly of the investment in property, so no BPR was due on the deceased’s partnership interest.
What’s the difference?
The tribunal in Ross contrasted the holiday cottages with a hotel, in terms of what guests pay for. HMRC’s view on hotels and bed and breakfast accommodation (in its Shares and Assets Valuation manual, at SVM111180) is that such establishments will not usually be caught by the ‘wholly or mainly investment’ exclusion from BPR, in view of the level of services provided.
However, HMRC’s guidance also refers to the ‘self-service/budget hotel industry’ and ominously instructs its officers to ‘ascertain the nature of the ‘hotel’ business to establish whether on the facts it actually falls within the investment end of the spectrum.’
HMRC’s position is that furnished holiday lettings will not, in general, qualify for BPR. Its guidance (in HMRC’s Inheritance Tax manual, at IHTM25278) states: ‘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.’ However, the three tribunal decisions mentioned indicate a high hurdle to jump. It appears that the closer the nature of the holiday lettings to a ‘traditional’ hotel business in terms of services, the better the chance of a successful BPR claim.