Business Property Relief – Furnished Holiday Lettings – case update

 In Tax

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Case Summary from LawSkills | Private Client specialist trainersAt last – a win for the tax payer on Furnished Holiday Letting (FHL) and IHT Business Property Relief (BPR) – PRs of Graham v HMRC [2018] UK FTT 306.

Grace Graham ran a business from her home at Carnwethers on St Mary in the Scilly Isles which had originally been an old farmhouse which she and her husband renovated and ran first as a B & B then as a Hotel and then from 2003 as self-catering holiday accommodation.

It was a business of providing accommodation from four self-contained flats or cottages each with its own kitchen & dining/living area. There were overspill rooms in the main farmhouse occupied by the family. There was a croquet lawn at the back of the house; prize winning gardens with barbeque area and a swimming pool with sauna. There was a games room and laundry at one end of the pool.

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Louise Graham returned to work with her mother Grace in 2008 following her father’s death and Louise stepped up her involvement following her mother’s stroke in 2010. Extensive services were provided.

Lettings took place between April and October, as the boat to St Mary’s stops running between November and the end of March – between 2009 and 2012 the occupancy rate was between 83 and 94%. Out of season planning, repair and administrative work were undertaken and staff holidays were taken.

Louise Graham provided a break-down of the 200 hours per week it took to run the business in season.

A valuer advised the Tribunal that had Carnwethers been let on a shorthold tenancy its annual rent would have been about £27,600 pa whereas the gross income from the business was £74,000 per annum.

The Quality in Tourism report of 2012 confirmed the attention to the needs of their customers was particularly important and awarded Carnwethers 4*

Arguments in favour of getting BPR

  • The test for BPR is whether or not the business is wholly or mainly one of holding investments
  • Neither the Tourism officer nor the valuer regarded Carnwethers as an investment business
  • On the spectrum discussed in HMRC v George [2004] STC 147 the business was nearer to the hotel end of the spectrum rather than a simple holiday let
  • The Tribunal had to look at the business in the round as per HMRC v Brander [2010] UKUT 300
  • In HMRC v Pawson [2013] UKUT 50 the judge went too far & was inconsistent with HMRC v George when saying a holiday letting business was a typical example of a property letting business and therefore an investment business irrespective of the quantity of services offered

Arguments against BPR

  • HMRC accept that Carnwethers is a commercially run business in which the owners and employees worked hard
  • Martin v IRC [1995] STC 5 showed that it was not Parliament’s intention that the relief should apply to a landlord letting land
  • HMRC accept there is a spectrum – but what mattered was the nature of the business
  • The provision of extra services is unlikely to be material to prevent the business being mainly one of property investment
  • Much of what was offered to guests on top of the use of the land was minor or ancillary

The Tribunal reviewed the cases and also the recent case of Vigne v HMRC [2017] UKFTT 632 which criticised the Judge’s approach in Pawson.

The test is:

  • Is the business mainly one of holding investments?
  • Look at the components to the business – is any part of them holding or not holding investments?
  • Then step back and look at the whole picture

The Tribunal applied this test to each of the activities at Carnwethers and concluded that

“ There are various perspectives from which to appraise the business carried on at Carnwethers. In so doing it is the nature and extent of the activities rather than their intensity which is relevant. Thus the intensity of property management activity cannot turn it into non-investment activity, but the extent of additional services can be such that the preponderance of activity is not investment activity”

Practice point

The case law suggests that only an exceptional letting business will fall on the non-investment side of the line. Carnwethers was such an exception – BPR was allowed. So it is time to review with your clients whether they are able to do as much as they do in Carnwethers to move into having a trading business and secure BPR from their FHL.

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