Looking at the recent decision in Graham v HMRC
Business Property Relief (‘BPR’) reduces the value of business assets when calculating the inheritance tax liability. Essentially, the premise behind it is to ensure that trading businesses don’t have to be sold in order to pay the tax. It is available at a rate of 50%, or 100%, depending on the nature of the relevant property and on who owns it.
This relief can therefore be extremely valuable to the beneficiaries of an estate and important to the business in question.
HMRC notoriously denies this relief to holiday lets.
The main requirements for BPR to apply are set out in the Inheritance Tax Act 1984 and are as follows:
- That there is a qualifying business (this includes a business carried on in the exercise of a profession or vocation, but excludes one carried on otherwise than for a gain
- That the asset is ‘relevant business property’
- That the two-year minimum period of ownership is met
In most cases, the first and third criteria are unproblematic. The second usually precludes most holiday homes from qualifying but a recent case has seen rare victory for the tax-payer (Graham v HMRC [( UKFTT 0306 (TC)).
Section 105 denies relief for businesses which ‘consist wholly or mainly of … dealing in securities, stocks or shares, land or buildings or making or holding investments’. In other words, most furnished holiday lets will be considered purely investment and not a trading business qualifying for BPR.
HMRC confirm that taking an income by the receipt of rent from land has been held to be an investment activity. Even if that rent includes the cost of services such as repair and maintenance, because this ‘property management’ is deemed part-and-parcel of the business of holding property as an investment.
As I have said, very few furnished holiday-lets qualify. In most cases, the services will be deemed relatively standard in nature, geared to maximising income, as with any other holiday letting. However, in order for BPR to be available there must be the provision of significant ‘additional services’. The level of additional services provided must be “so high that the activity can be considered as non-investment”. (HMRC’s manual IHTM25278).
What will constitute significant ‘additional services’?
In HMRC v Pawson’s PRs (2013) it was established that extra services like cleaning, washing, bedding, television and garden maintenance did not constitute significant activities in this case and BPR was denied.
However, some owners are devoting a significant amount of their time in running these lettings and really are operating them like any other business, providing additional services far beyond changing the bedsheets.
To some extent it may be right that a property which serves primarily as a holiday home for a family then rented out at other ad hoc times of the year should not benefit from an IHT relief designed to help trading businesses continue as such following the death of the owner. However, for some, this really is a family business with little difference to those businesses qualifying for relief.
This has subsequently rendered a constant battle between land-based businesses and HMRC. The case of Graham was one such case.
Graham v HMRC – a rare victory for the taxpayer
In the past, most claims for Business Property Relief against holiday homes have seen decisions against the taxpayer. Whilst the Graham case unusually saw a taxpayer triumph over HMRC, in reality it may be that not much has changed.
The case of Graham was concerned with four self-contained, self-catering holiday flats let out for 25 weeks of the year but with other onsite facilities, including a pool, homemade food and drink, games room and gardens.
Guests were able to take herbs from the garden, tomatoes from the greenhouse and fruit from the trees. Three or four barbeques for the guests were organised in each main holiday season. Indeed, the owner of the property would even take orders from guests for crab she would obtain freshly caught from the quay.
The owner was closely involved in the running of these lettings and provision of amenities, akin to the manager of a hotel. (Indeed, you must be bordering on the nature of a hotel before you can hope of a successful claim for BPR.)
The final tribunal decision in Graham concluded that “an intelligent businessman would view it more like a family-run hotel than a second home let out in the holidays”. The winning party succinctly pointed out that something is an investment if your money works for you, whereas a non-investment business is one which you work to produce income.
Hotels and Bed & Breakfasts have been distinguished from mere exploitation of land and BPR will generally apply if the other criteria is satisfied. It has however been quite clear for some time that holiday lettings need to offer significantly more than just accommodation, in order to qualify.
Some examples of additional services might be things like horse-riding expeditions, watercolour classes, pottery classes, birdwatching, outdoor cinema. These activities ought to be led by the property owner.
In Graham, the services were seen as not merely being ‘ancillary to the use of the flat’ and provides a useful case study for BPR claims on holiday lets going forward.
This paper is intended to be a brief note for clients and other interested parties. The information is believed to be correct at the date of publication but should not be relied upon as a substitute for professional advice. Please speak to a member of our team.