Another one bites the dust!

By | 12 April 2022

Inheritance tax (IHT) business property relief (BPR) is available to business owners if certain conditions are satisfied. BPR (at the 100% rate) applies to ‘relevant business property’ including a business or interest in a business.

Unfortunately, not every business potentially attracts BPR, such as where the business consists wholly or mainly of ‘making or holding investments.’ Residential property lettings are capable of amounting to a ‘business’ but will rarely be eligible for BPR.

Exception to the rule?

What about furnished holiday lettings (FHLs)? HMRC’s position is that FHLs will not normally qualify for BPR, although HMRC’s Inheritance Tax manual states (at IHTM25278): ‘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.’

BPR claims have been unsuccessful in several cases, including Lockyer and Robertson (Personal representatives of Pawson) v Revenue and Customs [2013] UKUT 050, Green v Revenue and Customs [2015] UKFTT 334 (TC), and Executors of the Estate of Marjorie Ross (Deceased) v Revenue and Customs [2017] UKFTT 507 (TC).

Mainly investment

More recently, in Cox, Executors of the late v Revenue and Customs [2020] UKFTT 442 (TC), the deceased (SC) had owned and run four holiday flats in Scotland. HMRC refused to allow BPR on the FHL business.

The business activities broadly comprised: investment (e.g., accommodation, parking spaces, communal laundry facilities, repairs and maintenance, gardens and grounds, summer house, and dealing with bookings and advertising); Incidental/ancillary (e.g., provision of electricity and other utilities, appliances and furniture, kitchen utensils and crockery, basic essentials such as tea and coffee, washing up liquid, toilet paper, plus cleaning the apartments, laundry of bed linen and towels, welcoming guests); and non-investment (e.g., provision of books, DVDs, information leaflets, tennis or badminton racquets, crab lines, frisbees, bucket and spades).

The First-tier Tribunal (FTT) found that the FHL business fell firmly on the investment side of the line, so the BPR claim failed.

More services

What would it take for a FHL business to obtain BPR? In Personal Representatives of Graham v HMRC [2018] UKFTT 306 (TC), an individual’s business (‘C’) involved four furnished self-catering flats/cottages in the Scilly Isles. Running the business required around 200 hours work per week.

The FTT noted that certain services/activities were found in a normal small hotel or guesthouse and at C (e.g., guest rooms, towels and linen, cleaning, tourist information, tea coffee and milk, a reception and communal sitting room). Some provisions and activities were found at C but not generally at smaller hotels (e.g., swimming pool, sauna, bikes to hire, games, ornate garden, marmalade and other provisions, and the welcoming of guests). Other services/activities were normally provided at a hotel or guesthouse but not at C (e.g., meals, a bar, the daily making of beds, and cleaning/tidying).

The FTT concluded that C was an exceptional case which just fell on the ‘non-mainly-investment’ side of the line. BPR was allowed.

Practical point

Case law so far suggests that the closer the nature of the FHLs to a ‘traditional’ proprietor-run hotel business in terms of services, the better the chance of a successful BPR claim.

The above article was first published by Property Tax Insider (June 2021) (