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August 7, 2017

Availability of Business Property Relief on Furnished Holiday Lettings

The case of M. Ross (Dec’d) v HMRC highlights the kind of activities that the courts will look at when determining whether a Furnished Holiday Let (FHL) is a business for the purposes of Business Property Relief (BPR), thereby obtaining 100% relief from inheritance tax.

The case revisits principles established in the Pawson and Green cases which were also in relation to the availability of BPR on FHLs. A review of these cases may be found here.

In both previous instances, BPR was denied on the basis that the services provided in relation to the running of the FHLs was not sufficient enough to be regarded as trading income, a requirement for BPR to apply.

The Facts

  • Marjorie Ross's estate contained a 2/3 share of the Green Door Cottage Partnership (the Partnership). Ross' daughter, Mrs Oldrieve, had managed the Partnership for a number of years. The Partnership owned 8 holiday cottages, 2 staff flats, and a further property in Weymouth also used as holiday accommodation.
  • During the relevant period, all 8 cottages and the property in Weymouth were rented out. One staff flat was used by the employee handyman of the Partnership, whilst the other was on a long lease to the nearby Port Gaverne Inn hotel (the Hotel).
  • The Hotel had a close relationship with the Partnership, having previously been owned by Ross and her husband. Both businesses were run complementary to one another, as they had been when under the Ross’ ownership. The Hotel continued to provide a number of administration services to the Partnership, and guests of the cottages could have breakfast and order snacks at the Hotel.
  • The total value of the properties held in the Partnership was externally valued at £1.5 million. Ross’ executors claimed BPR relief on the whole of her 2/3 share of the Partnership.

The Case

The case put forth by the taxpayer was fairly comprehensive and included testimonials from guests and staff, a breakdown of time spent by Oldrieve on the day to day running of the Partnership, and an allocation of expenses in relation to the services provided (trade v investment).

Their argument was that the Partnership provided extensive services and a ‘holiday experience’, drawing attention to the amount of time spent by Oldrieve on managing the Partnership, her regular attendance at the cottages, and that the services being provided were ‘more akin to a hotel than a typical self-catering holiday’. Whilst they were clear that the Partnership was not providing hotel-like services, they argued that the services that they did provide were more than ancillary to the provision of land.

HMRC accepted that the level of services provided by the Partnership was more extensive than those considered in previous decisions, however they argued that the case does not differ too significantly from the previous cases named above, and the primary activity remained in the exploitation of land for rent.

The Decision

The tribunal found in favour of HMRC, held that BPR should be denied on the FHLs. The decision was made based on principals established in previous cases regarding the level of services, and it was found that the Partnership did not provide the level of services necessary to successfully challenge the default position that a business whose principal activity involved deriving income from the occupation as land was mainly one of investment.

Whilst it is possible for BPR to be available on an FHL where sufficient services are provided, this decision demonstrates that the 'trading activity' hurdle is a difficult one to cross and each case should be evaluated on its own merit.

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