Inheritance tax (IHT) relief at the rate of 100% is an attractive proposition. 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 (in certain other cases, BPR is available at 50% instead).
Unfortunately, not every business attracts BPR. There is an exclusion from BPR (subject to certain limited exceptions) if the business consists wholly or mainly of (among other things) ‘making or holding investments’ (IHTA 1984, s 105(3)).
Perhaps unsurprisingly, the absence of a statutory definition of ‘holding investments’ has caused disputes between taxpayers and HM Revenue and Customs (HMRC), resulting in a number of court and tribunal cases.
The availability of BPR in respect of holiday accommodation businesses has been one such area of dispute. HMRC sometimes contend that there is no ‘business’ at all. Even if the taxpayer jumps this hurdle, HMRC will often resist BPR claims on the basis that the activities fall within the above exception for investment businesses.
HMRC considers that furnished holiday lettings will generally not qualify for BPR (see HMRC’s Inheritance Tax manual at IHTM25278). BPR claims have been unsuccessful in several cases, most notably Lockyer and Robertson (Personal representatives of Pawson) v Revenue and Customs  UKUT 050, and also in Green v Revenue and Customs  UKFTT 334 (TC) and Executors of the Estate of Marjorie Ross (Deceased) v Revenue and Customs  UKFTT 507 (TC).
However, an appeal against HMRC’s rejection of a BPR claim in respect of a furnished holiday lettings business was successful more recently, in The Personal Representatives of Grace Joyce Graham (Deceased) v Revenue and Customs  UKFTT 0306 (TC) (‘Graham’).
In Graham, an individual (GJG) ran a business involving the provision of accommodation in four self-contained, furnished, self-catering flats or cottages, which were part of an enlarged old farmhouse (C) in the Isles of Scilly.
The guest facilities included a games room with a snooker table, table tennis, board games and videos, a sauna, laundry room and a barbecue area. There was also a heated swimming pool. Covered areas housed a golf buggy and bicycles, which were available to guests for payment. Inside the house was a separate guest lounge with a collection of books and an open fire (in season). A range of services was provided to guests. For example, on arrival at C guests were offered refreshments; they were helped to their accommodation and given a ‘welcome pack’ which included a ‘what’s on’ guide to the week. At the start of each visit each flat was supplied with flowers, home-made marmalade, sometimes wine (or occasionally champagne), home-made bread, milk, tea, coffee, sugar, toilet rolls, soaps and shampoos, washing-up liquid and lavatory bleach. The cottages were occupied by guests between about April and October. Running the business required in total about 200 hours work per week by GJG’s daughter with assistance from GJG and others.
GJG died in November 2012. On submitting an IHT account for her estate, GJG’s personal representatives claimed BPR on her interest in C. However, HMRC rejected the BPR claim, on the basis that the business was mainly one of holding an investment (within IHTA 1984, s 105(3)). The personal representatives’ appeal was allowed. The First-tier Tribunal concluded that C was an ‘exceptional case’ which just fell on the ‘non-mainly-investment’ side of the line. An ‘intelligent businessman’ would regard it more like a family run hotel than a second home let out in the holidays.
Compare and contrast?
It might be thought that comparing and contrasting holiday accommodation in a particular case with (say) a small hotel would be instructive. For example, in Graham the tribunal noted that:
- Certain services and activities were found both in a normal small hotel or guesthouse and at C (e.g. a room for the guests’ sole occupation, towels and linen, cleaning, tourist information, tea coffee and milk, a reception and a 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, a large ornate garden, marmalade and other provisions, and the welcome given to guests).
- Other services and activities would normally be provided at a hotel or guesthouse but were not provided at C (i.e. meals, a bar (in larger hotels), the daily making of beds and cleaning/tidying, and room service in larger hotels).
However, noting these differences and similarities did not help the tribunal to reach a clear conclusion.
HMRC’s guidance in IHTM25278 acknowledges: “There may however be cases where the level of additional services provided is so high that the activity can be considered as non-investment.” Each case should therefore be considered based on its own facts.
The above article was first published in Property Tax Insider (November 2018) (www.taxinsider.co.uk).