Inheritance Tax relief on Furnished Holiday Lets - a diminishing possibility?

It is widely appreciated that properties let as furnished holiday accommodation receive privileged tax treatment in comparison with residential lettings. This treatment is as a result of the activity being treated as a trade for Income Tax and Capital Gains Tax (CGT). However the prospect of the letting activity being treated as a trade for Inheritance Tax (IHT) and therefore attracting Business Property Relief (BPR) is looking increasingly grim.

The rules

BPR can provide relief from IHT at rates of up to 100%. However it only applies to businesses which qualify as ‘wholly or mainly trading businesses’.  If a business activity is predominantly investment no relief will apply to the business assets at all. This can be particularly troublesome as the properties involved can be of a substantial value and if no relief applies IHT at the rate of 40% will be payable on this value where it exceeds the Nil Rate Bands available.

Whether a furnished holiday let (FHL) activity qualifies as a trade appears to be on HMRC’s radar and they been successful in a couple of cases over the last few years where the level of services provided to holidaymakers has not been notably high.

Perhaps more notable is their success in a recent First Tier Tribunal (FTT) case, the ‘Ross’ case which concerned FHLs in the West Country.

The fact of the case

Mrs Ross died in 2011 when she held two-thirds of the Green Door Cottages Partnership. This owned eight holiday cottages, two flats and UpsideDown House.  Mrs Ross’ share of the business was valued at between £1 million and £1.5 million, on her death.

The eight cottages and UpsideDown House were let as holiday accommodation. One flat was let to a handyman employed by the partnership and the other was let to a neighbouring hotel for staff accommodation. This hotel had been owned previously by the Ross family and despite separate ownership, since 2002, continued to have a close business relationship with the cottages. The hotel provided services and facilities to guests of the cottages in exchange for the tenancy of the flat and a percentage of turnover.

The services the hotel supplied to guests included dealing with bookings and phone enquiries, providing a guest welcome service, turning on heating, accepting left luggage, answering queries, delivery of bar meals and discounts on bar meals in the hotel and ordering milk and newspapers. The cottages on occasion were let as hotel bedrooms i.e. fully serviced.

The executors suggested that the partnership business provided services “more akin to a hotel than a typical self-catering holiday, and those services should include the services provided by the hotel as agent for the partnership. Those services in particular set this business in a different category than even the most actively managed holiday lets.”

HMRC contended that, while the level of services provided by the partnership was more extensive than those considered in previous decisions, those services were not enough to count as the greater part of the business.  In HMRC’s view: “what is really being provided is land, or the right to rent land in a particularly attractive location in Cornwall and that is the main reason why people stay at these properties”.

The decision

The Judge agreed with HMRC’s argument and held that the standard, quality and cost of the activities provided were insufficient to overturn the view that the business was mainly one of letting land and not the provision of holiday services.

It is possible that the taxpayer will appeal this decision. However owners of FHLs should consider their succession plans in light of the decision. When looking at the recent cases it would appear that this case may have had the best chance of success for the taxpayer and the decision demonstrates how hard it would be for a FHL business to attract BPR. For many this may now appear unachievable.

Possible actions

A lifetime gift of a FHL property may therefore become an attractive proposition and providing certain conditions are met this gift could qualify for CGT holdover relief, resulting in a tax free transfer if the donor survives for seven years following the gift.

For taxpayers with wider trading businesses, it may also be worth considering the extent that the FHL business is integrated in the wider business. However this can be complicated in practice and it would be imperative to take proper advice to avoid jeopardising relief on the whole business.

Conclusion

It will be appropriate for FHL owners to consider their position and succession plans and there is the opportunity for significant tax savings to be made with appropriate advice. Due to the complexity of the rules it is important that professional advice is taken before any action is pursued.

Should you require further assistance with this or any other tax matter, Mairi Drummond of Rennie Welch LLP specialises in the taxation of furnished holiday accommodation and can be contacted on (01573) 224391 or at mairi.drummond@renniewelch.co.uk.

Rennie Welch LLP accepts no liability on the basis of this article and detailed advice should be sought before entering into any transaction.