Cornwall Living
Busting the myth
An overwhelming number of holiday-let landlords believe that their property won’t be subject to inheritance tax. Think again.
In short, Business Relief is not available. The relief applies to reduce the chargeable value of a qualifying asset by either 100% (total relief) or 50%, saving inheritance tax that is generally chargeable at 40%, and therefore hugely valuable.
Broadly, the relief applies to trading business assets – interests in trading businesses themselves, assets used in a trading business and shares in unquoted trading companies. Furnished holiday lets (FHLs) are a property investment activity (not a trade) that is deemed to be a trading activity for many tax purposes, and are, at least theoretically, capable of qualifying for inheritance tax Business Relief. This the starting point of the great myth!
For Business Relief to apply, the business asset being considered must not consist of “wholly or mainly…making or holding investments”. Property businesses are notoriously difficult for placing on the scale of investment activity on one end of the scale and training activity on the other. The extremes of a landlord letting a property on an AST or commercial lease on the one hand of extreme property investment, with a hotel operation or property development/construction operation on the other extreme of the scale at the trading end. FHL activity falls somewhere in between these extremes, falling somewhere mid-way along the scale – how far along the scale the particular FHL activity sits determines the qualification for Business Relief.
Where an FHL fits on this property activity scale is largely determined by the provision of services, and the facilities provided. The myth can be whittled down to FHL landlords assuming that their FHL property interests automatically qualify for Business Relief, whereas placement on this scale actually determines qualification – and the bar is an extremely high one!
The view of HM Revenue & Customs (HMRC) is stated (in their Inheritance Tax Manual to their officers) as: “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.”
This opinion has been consistently ratified by the tax tribunals and courts – as is evidenced by the significant number of judgements that have gone in HMRC’s favour when challenging Business Relief claims made by executors of deceased estates owning interests in FHLs.
In recent years, only one judgement by the First Tier Tribunal has resulted in a win for the taxpayer, and even this reaffirms the position that the bar is incredibly high for any FHL landlord to meet to be considered to qualify for Business Relief.
This case was the case of Personal Representatives of Graham versus HMRC – a ‘home case’ given that it concerned an FHL business on the Isles of Scilly. HMRC enquired into the claim for Business Relief in relation to the four self-catering flats, and farmhouse occasionally used as bed and breakfast accommodation. As ever, the question was whether Mrs Graham and her daughter (who ran the business) were providing enough additional services to mean that the business was not one of property investment.
The tribunal heard that the services and facilities included refreshments and a welcome pack on arrival; the owners being on hand to take in shopping, organise celebrations and organise activities, as well as arrange the purchase of fresh fish for their customers; an outdoor pool; well-maintained gardens; a sauna, games room, laundry, separate guest lounge and barbeque area; the supply of fresh flowers, homemade goods, toiletries, books and more; as well as a golf buggy and bicycle hire.
In short, the services and facilities were extensive, and the operation was demanding. The tribunal decided that it was “an exceptional case which does, just, fall on the non-mainly investment side of the line”. It is difficult to see what more an FHL landlord could do to push the operation firmly over the line. It evidences the difficulty FHL landlords face, as opposed to being held out as a victory and signal for change.
FHL landlords need to be aware that they are highly unlikely to qualify for inheritance tax Business Relief, meaning that their interests in the properties will be chargeable to inheritance tax. This means that it makes sense to seek experienced and professional advice on how best to plan for this.
