BPR on furnished holiday lets
Green v HMRC  UKFTT 334
The First Tier Tax Tribunal (“The Tribunal”) has held that a furnished holiday letting business involved mainly the making and holding of investments so that it did not qualify for Business Property Relief (‘BPR’) for Inheritance Tax (IHT) purposes. Arguments about the additional services supplied to the holidaymakers by the owners were found to be unconvincing because the starting point would always be that owning and holding land to obtain income should be characterised as an investment activity. This case demonstrates that individuals have an uphill struggle to persuade any Court that their business is on the “hotel side” of the investment/non-investment spectrum.
Mrs Anne Green (Mrs G’) ran a business called Flagstaff Holidays (“the Business”) which let 5 units of self-contained holiday accommodation in Norfolk. Mrs G transferred 85% of the Business to a settlement called the Mrs ACC Green Settlement (“the Trust”) in two tranches. Mrs G argued that both transfers qualified for 100% Business Property Relief (“BPR”) under the Inheritance Tax Act 1984 (IHTA 1984), Part V Chapter 1, as being “relevant business property”.
HMRC accepted that Mrs G was carrying on a business but decided that the transfers did not qualify for BPR because the Business consisted “mainly” of “making or holding investments”. Mrs G appealed that decision to the Tribunal.
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Mrs G argued, to distinguish her case from HMRC v Pawson  UKUT 50 (‘Pawson’) [which overruled Pawson v HMRC  UKFTT] which had very similar facts to this, that her business was more akin to a hotel rather than the granting of a tenancy with other activities. In particular:
- The units in the property were not let under tenancy agreements
- The income arising was therefore not rent so there was no investment income
- The services and facilities supplied by the business were similar to and sometimes better than those provided by budget hotels and
- Tenanted properties are commercially less risky than Mrs G’s business which offered self-catering properties
Mrs G sought to distinguish the position of her business from that in Pawson because;
- The level of activity and income was higher with more units with an average annual income of £87,000 compared to £6,178 in Pawson. As a result Mrs G’s business had to pay business rates and VAT and was charged for the removal of refuse
- Mrs G’s business had a website and marketing strategy unlike in Pawson
- The services and facilities provided by Mrs G were superior to those in Pawson
- The amount of which Mrs G’s units could be let on an assured shorthold tenancy was considerably more than in Pawson
By section 2 IHTA 1984, IHT is charged on chargeable transfers that are not exempt transfers.
S104 (1) IHTA 1984 provides that
‘where the whole or part of the value transferred by a transfer of value is attributable to the value of relevant business property, the whole or that part of the value transferred shall be treated as reduced-
- in the case of property falling within section 105(1) (a) (b) or (bb) below by 100%
- in the case of other relevant business property, by 50%but subject to the following provisions of this Chapter’
Section 105 IHTA 1984 so far as relevant of this decision reads:
“(1) Subject to the following provisions of this section and to sections 106,108, 112 (3) and 113 below, in this Chapter ‘relevant business property’ means, in relation to any transfer of value-
- Property consisting of a business or interest in a business;
(d) any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on…by a partnership of which he was then a partner….
(3)A business or interest in a business…. are not relevant property if the business ….. consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks or shares, land or buildings or making or holding investments”.
The Tribunal considered the meaning of ‘relevant business property’, which has been considered in a number of recent cases such as HMRC v George  EWCA Civ 1763, Weston v HMRC  STC 1064, Pawson and in particular Best v HMRC  UKFTT 77.
The Tribunal found that Mrs G’s units consisted mainly of making and holding investments so that they did not qualify for BPR to be effective for IHT purposes.
In rejecting Mrs G’s submissions the Tribunal while acknowledging that Mrs G had made a valiant effort to distinguish Pawson, the relevant test as set out in Henderson J, in Pawson was ‘ not the degree or level of activity but rather the nature of the activities that are carried out’.
The Tribunal had to decide whether the business was ‘mainly’ investment. The Tribunal followed the earlier decisions in concluding that activities such as marketing, pricing, booking accommodation, dealing with complaints and requests, insurance, repairs and maintenance are investment activities. Payment of business rates is also part of the costs of managing the investment.
The Tribunal found that the provision of electricity, the welcome pack, linen towels, equipment wi-fi and cleaning are non -investment activities but these activities were relatively minor and are ancillary to the provision of the accommodation.
The Tribunal accepted that there was a difference in scale between Mrs G’s business and the business in Pawson both in terms of number of units and income but scale was not a relevant issue.
The Tribunal therefore concluded that the extra services provided by Mrs G were insufficient to demonstrate that Mrs G’s business was other than ‘mainly’ one of holding the property as an investment. Consequently, Mrs G’s appeal was refused.
Practitioners should note that this judgment reinforces earlier decisions and reflects that it will be very difficult to show that a furnished holiday letting business is anything other than an investment business so making it unable to attract business property relief for IHT purposes.
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