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  • Property income tax – change of approach by HMRC as to whether income is trading income?

    3 March 2016

    Angela Wood

    Property income tax – change of approach by HMRC as to whether income is trading income?


    • Profits arising to an individual from a property business are subject to income tax;
    • A ‘property business’ means every business that a person carries on for generating income from UK land.
    • Profits that arise from a trade are also subject to income tax, but under a different regime;
    • It is usually beneficial (from a tax point of view) for income to be treated as trading income, as opposed to ‘property’ income.

    Whilst the commercial occupation of UK land (is treated as the carrying on of a trade, HMRC’s Property Income Manual provides that a letting activity will only constitute a trade if the owner remains in occupation of the property and provides services over and above those usually provided by a landlord.

    Furnished holiday lettings (FHL’s)

    Income from furnished holiday lettings (FHL’s) is taxed as ‘property’ income. However, for certain purposes, the commercial letting of FHL’s is treated as a separate trade.

    HMRC’s Business Income Manual provides that income from furnished lettings is rarely trading income. Indeed, it will only be so when the landlord remains in occupation of the property and provides services substantially beyond those normally provided by a landlord.

    In a recent case in the first tier tribunal, however, HMRC seem to have taken a different approach.

    Facts of the case

    Mr Nott, was gifted an estate that comprised a manor house, gardens, a farmyard, farm buildings and eight other separate units. Five of the units were rented out as holiday accommodation by Mr Nott.

    They were normally let for periods of no more than two weeks and each unit comprised at least one bedroom, a sitting room and a kitchen i.e they were fully self-contained.

    The units were cleaned at the end of each letting period (and guests could pay an extra charge for additional cleaning services). Mr Nott also offered cooked breakfasts for an additional charge.

    Guests were entitled to use additional facilities on the estate, including a swimming pool, a games area and a concierge service.

    Mr Nott’s treated the income from the accommodation units as income from a trade. HMRC disagreed, and sought to argue that the income from the cottages was, in fact, property income from furnished holiday lettings.

    Mr Nott appealed to the First-tier Tribunal.

    The decision

    The tribunal held that when assessing whether income is trading income or property income it is necessary to determine what is let, paid for and used.

    In making that determination, occupation of the property by the taxpayer and the nature and level of any services offered were important, but were not the only deciding factor.

    The tribunal considered the circumstances in which a taxpayer would be in occupation of a property for these purposes, stating that a taxpayer who remains in occupation of a property is more likely to be able to show that they are receiving trading income than a taxpayer who does not remain in occupation.

    The tribunal concluded that it was unclear whether occupancy for these purposes only required legal occupancy or, as asserted by HMRC, it was to take its natural meaning and be determined by reference to the relevant facts and circumstances.

    Based on the facts, the tribunal found that Mr Nott was not in occupation under either interpretation.

    The tribunal held that, based on the facts, the additional services provided by Mr Nott were not sufficient to change things, such as to convert the underlying activity of exploiting property to that of providing a package of services of which accommodation only comprised part.

    The income was not trading income.


    The decision would appear to contradict many people’s long held views on this, derived in part or in the main from HMRC’s Property Income Manual. In the hearing before the tribunal, HMRC confirmed that (contrary to what appears in the property income manual) they do not solely focus on occupation or services, but will instead examine the nature of the activity that gives rise to the payment.

    This property income tax decision provides a useful discussion on when income from furnished holiday lettings can be trading income. It is clear that the tax treatment is fact dependant, which means that individuals must carefully consider the circumstances in which income arises to them.

    If you have any concerns or questions about property income tax or any tax aspect of your property trading, investment or development activities, please give us a call.