Business Property Relief and Furnished Holiday Lettings – To B(PR) or not to B(PR)?
Tax Advice Update – The position on Furnished Holiday Lettings following the Graham Case… Where we are now following the Graham case?
IHT and Land-based businesses, have recently been something of a battleground between taxpayers and HMRC, particularly in relation to Furnished Holiday Lettings.
Business Property Relief (BPR) is a very valuable relief from Inheritance Tax. Relief is provided on the transfer of relevant business assets at a rate of 50% or 100%.
HMRC has invariably tried to deny BPR on furnished holiday lettings on the basis of IHTA 1984 s.105(3). This section denies BPR to businesses that ‘consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments’.
HMRC’s starting position is that most people own holiday lets as investments in the underlying land, rather than as income-generating businesses. This is a different position to that of hotels or bed and breakfast accommodation.
This view has been historically been supported by case law. The Upper Tax Tribunal followed this view in the Pawson case in 2013, with the judge explicitly stating: ‘I take as my starting point the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity … the fact that the Pawsons carried on an active business of letting Fairhaven to holidaymakers does not detract from the point that … the business was basically one of an investment nature.’
In Pawson the taxpayer was not granted leave to appeal, with Lord Justice Briggs stating that there was no realistic prospect of the appeal succeeding, because ordinary property lets did not provide sufficient additional services to qualify as a business.
This appeared to establish the precedent, and was followed by a series of defeats for taxpayers. These included Ann Green v HMRC  UKFTT 334, and Executors of Marjorie Ross v HMRC  UKFTT 507(TC).
However, the wording of the legislation does allow room for a different view, depending on the circumstances.
The Graham case
In the recent First-tier Tax Tribunal case of Personal Representatives of Grace Joyce Graham deceased v HMRC  UKFTT 306 (TC) the taxpayer challenged Henderson J’s ‘starting point’ that holding land to obtain an income is essentially an investment. Rather, she said, there is a spectrum, with basic letting or leasing at one end, and hotel-keeping or letting combined with the provision of other activities and services at the other.
Mrs Graham ran a business near St Mary’s on the Isles of Scilly comprising four self-contained flats or cottages which were part of the farmhouse “Carnwethers” where she lived.
- Mrs Graham and her husband had renovated Carnwethers in the 1970’s and run a B&B, a hotel and then Furnished holiday let accommodation from the property. Following Mr Graham’s death in 2007 their daughter Louise started assisting with running the business.
- Leisure facilities were provided such as a swimming pool, sauna, games room, croquet lawn, bicycles for hire, and a barbeque area, as well as a laundry room.
- On arrival a welcome pack and supplies were provided and guests given refreshments, and told to help themselves to produce from the gardens such as herbs and tomatoes.
- Louise made particular efforts to help and advise guests. She sourced fresh crab for guests, had occasionally been called upon for emergencies in the middle of the night and rescued guests lost on the island.
- In season the pool was skimmed twice a day with other cleaning of facilities and gardening taking place on daily and weekly rotas adding up to about 200 hours per week including changeovers.
On Mrs Graham’s death her Personal Representatives (PR’s) made a claim for BPR in respect of Carnwethers.
HMRC did not dispute that she had been running a business but contended that “the business consisted mainly in the holding of an investments, namely her interest in Carnwethers, and was therefore not relevant business property by virtue of section 105(3) IHTA 1984.”
The PR’s appealed.
The FTT allowed the appeal concluding that the business was not one which consisted wholly or mainly of holding investments.
In considering earlier precedents, particularly Ross, Green and Pawson Judge Charles Hellier stated :
In Ross more was provided than in Green, and more was provided in Green that in Pawson, yet in none of those cases did the tribunal find that the preponderance of activity and effort lay otherwise than in the letting of the investment, the land.
But in the case of Carnwethers yet more was provided by way of additional services than in any of those cases; the pool, the sauna, the games room, the bikes, the food, the personal help and assistance. We did not regard these services as merely ancillary to the use of the flat.
In George Carnwath LJ said that in the case of a business of letting a building the additional services provided by the business were “unlikely to be material” because they would not be enough to prevent the business being one of investment. In Pawson Henderson J drew from this the implication that “in any normal case an actively managed property letting business” would be mainly holding investment.
Thus it will only be the exceptional letting business which falls on the non-investment side of the line.
Overall we conclude that Carnwethers was an exceptional case which does, just, fall on the non-mainly-investment side of the line. The pool, the sauna, the bikes, and in particular the personal care lavished upon guests by Louise Graham distinguished it from other “normal” actively managed holiday letting businesses; and the services provided in the package more than balanced the mere provision of a place to stay. An intelligent businessman would in our view regard it as more like a family run hotel than a second home let out in the holidays.
Where we are now
Prior to Graham many FHL owners were wondering whether interpretation of the rules had effectively changed permanently to mean that they would not qualify for BPR. However the Graham decision demonstrates that this is not necessarily the case. Whilst highly subjective, it is the quantum, type, quality and nature of services provided that can clinch the argument.
Further cases are now being brought, each aiming to establish that they lie on the ‘additional services’ end of the spectrum.
One of these will be the case of Vigne v HMRC. In that case  UKFTT 632 (TC) the First-tier Tax Tribunal granted business property relief for a livery business, noting that ‘no properly informed observer could or would have said that the deceased was in the business of holding investments’. That could have much wider implications for activities such as grouse-shooting on landed estates, and as a result HMRC has appealed the Vigne finding to the Upper Tribunal.
Things may evolve further, but at the moment you would probably have to say that the starting point is still in most cases the Pawson presumption that holiday lettings will not qualify for BPR. However if you are genuinely running a business which is closer in nature to that of a hotel or B&B, with additional services being offered then you may be able to get relief.
The number of cases passing through tribunals does demonstrate HMRC’s willingness to pursue these cases and to put taxpayers through the stress, and cost, of tribunal hearings. The Graham case lasted over five years after Mrs Graham’s death – which does beg the question whether all executors would have the money or inclination to take on such a fight.
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