A recent tribunal ruling has cast considerable doubt over whether furnished holiday lettings can qualify for business property relief (BPR) and thus be exempt from inheritance tax (IHT).
Prior to 2008, HMRC had accepted that the majority of furnished holiday lettings would qualify for BPR. However, in November 2008, HMRC changed their view and said that they would look more closely at the level and type of services that are provided in deciding whether BPR would be available.
The underlying technical issue is that BPR is not available where the business consists wholly or mainly of holding investments. Whether or not the holiday letting activity constitutes a business of wholly or mainly the holding of investments is the crux of any analysis of a particular case.
This view has now been tested in the courts in the Pawson case which concerned 'Fairhaven', a large bungalow on the Suffolk coast which had been let as furnished holiday accommodation. The property was cleaned between lettings and a gardener tended the garden. After an initial victory for the taxpayer in the First-tier Tribunal the verdict was overturned in the Upper Tribunal in HMRC's favour. Perhaps more important than the verdict itself are some of the comments made by Mr Justice Henderson in his judgement.
Justice Henderson expressed the view that a holiday letting business was a typical example of a property letting business, albeit one of a specialist nature, and as such should be treated as mainly that of holding a property as an investment.
In order to qualify for BPR, owners of furnished holiday lettings will now need to demonstrate that they are providing a 'holiday experience' rather than just the simple provision of accommodation. However there is still no clarity as to the scope of the activities that would be considered sufficient to obtain this.
In another recent IHT case heard by the First-tier Tribunal, the tribunal ruled that the trustees of the David Zetland Settlement were not entitled to claim BPR on a commercial property (Zetland House), even though there was proactive management of the property and provision of a number of services and facilities to the tenants. In arriving at their decision, the tribunal drew on the principle in Pawson that the relevant test is not the degree or level of activity, but rather the nature of the activities which are carried out.
In reaching its conclusion, the tribunal noted the Pawson case had set the bar high in terms of turning an actively managed investment business into a non-investment business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.