It has long been understood that rental properties are generally treated as investment assets. Qualifying furnished holiday lettings*, however, benefit from some tax advantages by being treated as a trade for income and capital gains tax purposes by virtue of specific legislation.
But this favourable treatment is not automatically extended to business property relief (BPR) for inheritance tax purposes. In this case, it is necessary to demonstrate that the property involved is part of a business which does not consist wholly or mainly of making or holding investments. The question has been examined in a number of tribunal cases. The most recent is that involving the Estate of Marjorie Ross (deceased), which raised the very pertinent question of how much activity is required in order to establish that the business is not in fact simply one of investment in property.
The case involved an appeal against HMRC’s determination that a share in a partnership which operated a number of holiday cottages did not qualify for BPR. To the public observer it would have been easy to assume that the properties, being actively marketed as self-catering holiday cottages, but with the provision of many additional services, was a thriving holiday business. The additional services included such things as cleaning and changes of linen mid-stay, internet, on-site handyman, access to the adjacent hotel for meals and take away deliveries, children’s play facilities and even newspaper and milk deliveries. Guests even referred to the cottages as ‘the whole holiday package’.
The tribunal judge, however, was not persuaded. In dismissing the appeal she stated that the business must be looked at in the round, taking into account such factors as the quality of additional services as well as the quantity and whether expenses incurred were for the purpose of the holiday business or the underlying investment.
In also commenting that the taxpayer would probably not have wanted their business compared to a ‘holiday camp’ the tribunal made a comparison which gives an indication of the type and extent of activity and services required to establish a successful claim for BPR. The taxpayer may still appeal, but for the time being we have to assume that the bar has been set, perhaps higher than many taxpayers had hoped, with the provision of entertainment, for example, playing an important part in determining whether BPR is available on their holiday business.
*There are a number of conditions to be met in order to qualify as a furnished holiday letting.
First, the property must be situated in the UK or the European Economic Area (EEA) and must be furnished sufficiently to allow normal occupation for the users. The property must be let on a commercial basis with a view to making a profit and must meet certain conditions regarding occupancy and availability. Although these conditions are not straightforward, particularly in the first and last years of ownership, put simply the property must be available for letting as furnished holiday accommodation for at least 120 days in the year and must be so let for at least 105 days of the year. You cannot count continuous lets, to the same individual(s), in excess of 31 days for this purpose; nor can you include lets at nominal rent to family or friends as such lets would not be commercial.
For more information please get in touch with Jackie Hall, or your usual RSM contact.