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12 November 2019
There are some odd beasts on this planet. But in the tax world, there is probably nothing so odd as the Furnished Holiday Let or FHL.
A FHL is for all intent and purposes an investment. However, if one meets the conditions dictated by our noble tax legislation then it is transmogrified in to a trade. A consequence of this is that it potentially qualifies for the same kinds of relief that a trading business does. One such relief is business property relief.
Does HMRC like this? HMRC does not.
This article concentrates on the availability of business property relief for FHLs.
Business property relief is a highly attractive relief from Inheritance Tax which applies at a headline rate of 100% to relevant business property including:
However, the legislation sets out that:
“a business or interest in a business… [is] not relevant business property if the business… [it]… consists wholly or mainly of…[the] making or holding investments”.
As such, the common or garden property investor is sent packing.
However, the position for someone who is the owner of a FHL is potentially more nuanced.
In its manuals, HMRC sets out its view 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”
So what type and level of additional services are necessary?
This is the million dollar question and one must analyse the relevant case law to tease out the detail.
In conjunction with caravan parks, FHL cases form a sizeable proportion of case law in relation to BPR.
Sadly, in most cases – e.g. Pawson, Green and Ross – the Tribunals have found against the taxpayer. The bar in terms of additional services being set quite high.
Yet do not despair.
In the recent case of Personal Representatives of Graham v HMRC it was held by the Tribunal that the activities fell on the right line to obtain business property relief.
The key points in the case were as follows:
Following her death, the taxpayer’s personal representatives made a claim for business property relief on the assets of the business.
HMRC duly rejected the claim. As such, the personal representatives appealed to the First Tier Tax Tribunal (“FTT”).
The key question was whether the ‘additional services’ provided were enought to shift the business from being ‘one of wholly or mainly holding investments’ to a trading business.
The Tribunal considered in detail the additional services provided by Mrs Graham, which included:
Someone seemingly crunched the numbers and it was decided that the activities required c200 hours of work in a 35 week rental period.
Looking at the business in the round, the tribunal decided that it qualified for BPR.
Despite the Graham case, FHL owners should perhaps view non-qualification for BPR as the general rule unless significant additional services are provided.
As such, owners of FHLs should consider carefully their IHT position and, in most cases, progress on the basis that no business property relief is available.
If you have any queries about Business Property Relief Furnished Holiday Lets, or business property relief in general, then please get in touch.
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Business Property Relief Furnished Holiday Lets was last updated on 12 November 2019.