Author: Matthew Jeffery, Tax Director
Many holiday let owners have, and perhaps rightly so, assumed their holiday let business would be exempt from Inheritance tax on death. Unfortunately, HMRC and the Courts have rarely agreed, leaving the dependents of holiday let owners with significant tax burdens on their death.
As with all tax reliefs, the relevant legislation and case law will determine whether a taxpayer will qualify for a specific tax relief. Understanding the legislation and relevant case law is key to establishing if a holiday let business will be exempt from IHT or what you would need to do, to be exempt.
What is Inheritance Tax?
Inheritance Tax (“IHT”) is a tax payable on the value of a person’s estate following death. In the current tax year, 2023/24, no inheritance tax is due on the first £325,000 of an estate, with 40% normally being charged on any amount above the threshold.
If you leave your main residence to your children, then the nil rate threshold can raise from £325,000 to £500,000. If you were married, the threshold can rise to £1m.
For example, assuming the nil rate threshold is used up on a main residence, if the market value of a holiday let on death was £500,000 (after deducting any mortgage or other debts), IHT of £200,000 would be payable by an estate.
Is there relief for businesses?
Business Property Relief (“BPR”) is a valuable relief from IHT. Where it applies, 100% of the value of the business and business assets are exempt from IHT.
To qualify for BPR, a business must be trading. Section 105(3) IHTA 984 states “a business or interest in a business […] are not relevant business property if the business […] consists wholly or mainly of […] making or holding investments”.
The receipt of income from property is regarded as holding an investment rather than a trade. To qualify as a trade, business activities of such a scale must be undertaken to show that the business is not an investment business.
Implications for Holiday Let Businesses
The issue for Holiday Let owners is that HMRC don’t generally regard holiday letting as a trading activity for IHT purposes. As a result, BPR would not apply.
In their own guidance manual IHTM25278, HMRC state that “HMRC’s view is that furnished holiday lets will in general not qualify for business property relief. The income derived from such businesses will largely consist of rent in return for the occupation of property. 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.
HMRC have set the bar very high for holiday let owners to qualify for BPR. Unless additional services are offered, above what would normally be accepted of a typical holiday let, no relief from IHT will be available.
HMRC’s Manual goes on to state that “Services provided, such as cleaning, the provision of heating and hot water, provision of a welcome pack, and being on call to deal with queries and emergencies, were not of such a nature and extent that they prevented the business from being mainly one of holding an investment”.
Whilst taxpayers and their advisors have often challenged HMRC’s interpretation of the legislation, in general, HMRC’s view has unfortunately been supported by the Courts.
IHT Relief Cases – BPR Denied!
In recent years, there has been a string of cases heard by Tax Tribunals, that have gone against holiday let owners. The common theme being that activities carried out by the holiday let businesses were not deemed sufficient enough to be regarded as a trading business for BPR.
Below is a summary of cases that went in favour of HMRC and BPR was denied.
In HMRC v Nicolette Vivian Pawson (Deceased) [2013] UKUT 050,the Upper Tribunal decided that a Furnished Holiday Letting business did not qualify for BPR. The scale of the activities undertaken in conjunction with running the property business (cleaning, laundry, TV, light and heat) were more typical of the type undertaken by an investment business.
In Mr Bruce Firth & Mrs Rita Firth as Trustees of the L Bately 1984 Settlement v HMRC [2022] TC8542,the First Tier Tribunal (FTT) dismissed a claim for Business Property Relief. The taxpayer owned 4 properties with a total of 40 serviced apartments. One of the properties had a café on the ground floor and a reception desk. Welcome packs, bedding, Wi-Fi, cleaning etc was provided. Nevertheless, the services provided by the aparthotels in question were not sufficient to prevent it from being an investment business.
In Executors of the Late Sheriff Graham Loudon Cox vs HMRC [2020] TC07919, the First Tier Tribunal dismissed the taxpayer’s appeal for BPR on a holiday letting business, finding there was nothing exceptional about the business to elevate it beyond being one of mainly investment. The non-investment activities were so insignificant in scale as to be negligible and the ancillary activities such as cleaning, laundering bed linen and providing kitchen basics were an integral part of the provision of the accommodation and so were considered part of the business.
In Anne Christine Curtis Green v HMRC [2015] TC04519, the letting of five self-contained holiday units did not qualify for IHT Business Property Relief: the business was mainly one of investment. The guests were mainly left to their own devices and the services provided which included linen, Wi-Fi, laundry and caretaker services, were insufficient to demonstrate that the business was anything other than mainly investment.
Glimmer of Hope?
Whilst HMRC’s and the Courts position is clear, it does not do much to help owners of holiday lets understand with any certainty whether their businesses will qualify for BPR. What type of additional services are necessary? What level of additional services is sufficient?
The case of PRs of Graham v HMRC [2018] UK FTT 306 offers some hope to holiday let owners.
Mrs Graham ran a business comprising of four self-catering flats from her farmhouse on the Scilly Isles. In addition, two guest bedrooms in the main house were available for occasional use as B&B accommodation. Mrs Graham and her daughter were heavily involved in the day-today running of the business.
HMRC denied the claim for BPR, but it was successfully appealed at the First Tier Tax Tribunal (“FTT”).
The Tribunal considered in detail the additional services provided by Mrs Graham, which included:
- Use by guests of well-maintained gardens, a solar-heated outdoor pool, sauna, barbeque area, games room and laundry facilities.
- Supply of fresh flowers, homemade goods, toiletries and cleaning materials for each flat.
- Providing bicycles for hire
- Unpacking guests’ grocery shopping orders
- Assistance with arranging events/parties such as weddings, anniversaries etc
- Purchase of fresh fish for guests’ use
- Weekly cleaning of all communal facilities including the pool
It was noted in the judgement that the activities required about 200 hours of work in a 35-week rental season.
In its conclusion, the FTT stated that this was an exceptional case, which just fell on the ‘non-mainly-investment’ side of the line. The deciding factors were the pool, the sauna, the bikes and, in particular, the personal care lavished upon guests by the owner’s daughter.
Whilst it was expected HMRC would appeal the verdict, there is no public record of an appeal since 2018.
Where does this leave Holiday Let Owners?
The Graham case does provide a ray of light for holiday let owners that, in certain circumstances, BPR can be achieved. However, for the large majority of holiday let owners, the level of services typically provided by owners and expected by its customers, will not be sufficient to obtain BPR relief.
We know from case law that having multiple holiday let properties does not impact the trading status, it is the activities carried on and services provided by the owners that are key to the trading status, rather than investment.
Unfortunately, there is no specific criteria of what activities are required for a holiday let business to qualify for BPR. However, the provision of a cooked breakfast or other meals is certainly a key factor as B&B’s, Guest Houses and Hotels are regarded as trading by HMRC and BPR allowed.
Providing food or offering additional services like guided walks, hire of bicycles, educational classes, sporting activities etc could be an option to obtain BPR relief. However, this is likely to be restricted to owners of sites with multiple lets, perhaps a swimming pool or sauna and the flexibility to incorporate additional services.
Qualifying for BPR is a question of fact and degree. Each case will different. If you are unsure if your business would qualify for BPR, it is important you speak with a specialist. It is possible to obtain an opinion of your entitlement to BPR from HMRC via the non-statutory clearance application system.
What else can you do?
Providing additional services/activities required to obtain BPR is not practical or possible for the vast majority of holiday let owners. This can leave the dependents of holiday let owners with a significant tax liability on their death and an erosion in value of the estate they have worked hard to build during their lifetime.
The recent rise in the nil rate band from a maximum of £650,000 to £1m for a married couple will go some way to mitigating the impact for holiday let owners. There has also been talk of abolishing IHT all together!
Notwithstanding the above, there are some options available to holiday let owners to mitigate the impact of obtaining BPR. If an owner has an existing trading business that qualifies for BPR, they could include the holiday let within its ownership, assuming it does not impact the trading status of the existing business. For example, a successful manufacturing company with little or no other investment assets, is very unlikely to have BPR impacted by having the holiday let business under its umbrella. On death, the shares in the company owning the holiday let, would qualify for BPR.
Another option is to consider the gift of the property to dependents during their lifetime. Providing the doner lives for 7 years after the gift, the property will be outside of the estate for CGT purposes. As qualifying holiday lets can claim gift relief for Capital Gains Tax (”CGT”) purposes, there would be no CGT implications on transfer.
As with all tax planning, its best to do it sooner than later!
Disclaimer: This article was written by Matt Jeffery of Zeal Tax, a leading capital allowances specialist firm in the UK, as an educational piece to help holiday let owners understand their tax responsibility. The information provided in this article is of a general nature. It is not a substitute for specific advice on your own circumstances. You are recommended to obtain specific advice from a professional before you take any action or refrain from action. Whilst we endeavour to use reasonable efforts to furnish accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties.
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