In a departure from recent cases regarding holiday lets, the First-Tier Tribunal (FTT) has ruled that a holiday let in the Isles of Scilly is eligible for business property relief (BPR) for
inheritance tax (IHT).
Those looking to claim BPR on their own holiday lets may find this case instructive but should bear in mind that HMRC are likely to challenge claims until clearer precedents are set by higher tribunals or courts.
Background
- Grace Graham and her husband purchased a dilapidated farmhouse within an acre of land in St Mary’s on the Isles of Scilly in 1972.
- The farmhouse was renovated and extended before being used as B&B and then country house hotel up to 2003.
- From 2003, the business changed in response to increasing demand for self-catered holidays. Four self-contained flats were created with the main farmhouse used mostly for the family (though two rooms were used for guests and extended family as a B&B).
- Following the death of her husband in 2007, Grace’s daughter, Louise, returned to help run the property with Grace (who’s activities were more limited following a stroke in 2010).
- The business offered extensive amenities including: an exceptionally well designed and maintained garden with herbs, vegetables, and fruits available to pick, a large solar heated pool, board and video games, a sauna, laundry rooms, barbeque areas, a golf buggy, and bicycles.
- Guests’ flats were stocked with fresh flowers, home-made bread and marmalade, milk, tea, coffee, sugar, wine (and occasionally champagne), towels, linens, toilet rolls, soaps and shampoos, washing-up liquid and toilet bleach.
- The FTT also highlighted the personal care “lavished” by Louise and staff on guests including: greeting guests with tea, coffee, biscuits (and occasionally cake) for 30 minutes on arrival, hosting three to four BBQs a year, cakes for guests’ birthdays, cream teas for returning guests, organising events for weddings and anniversaries, taking in guests’ grocery deliveries whilst they were out, helping in emergencies, providing a taxi service to rescue guests lost on the island, and collecting fresh crab and fish (if requested).
- Less time was spent running the business as a holiday let compared to a hotel, but this was not a large reduction due to the extra time spent cleaning.
- Occupancy rates were high at between 83-94% in season and over 1/3 of these were return visits. The material reason the return visits was the welcome and help provided.
Previous Cases
BPR is a valuable relief which effectively allows assets to avoid a charge to IHT. Relief is available at up to 100% where an asset consists of interests in a business (e.g. a sole trade or partnership).
However, BPR is not available where the business in question is at least mainly (i.e. ≥51%) one of dealing in securities, stocks or shares, land or buildings, or making or holding investments.
The Court of Appeal in
CIR v George & Loochin [2004] established that letting property is normally regarded as the holding of an investment, however there is a wide spectrum.
At one end is land used as an investment which won’t qualify for BPR (e.g. granting a tenancy) and at the other end is land used for a wider non-investment business which can qualify for BPR (e.g. a hotel or shop).
Composite businesses must be looked at in the round to see were they fall on this spectrum.
Previous tribunal decisions in
Pawson v HMRC [2013],
Green v HMRC [2015], and
Ross v HMRC [2017] have shown how difficult it is to provide enough additional services to push a holiday letting business into the part of the spectrum where BPR may be available.
This Case
Grace died on 6 November 2012 and her personal representatives submitted a claim for BPR on her interest in the Scillonian business. HMRC challenged this claim insisting that no BPR was due.
The FTT examined the holiday letting business from several angles to test if the overall business was mainly the holding of investments.
Some aspects were clearly those of holding an investment: letting flats and rooms, advertising, taking bookings, repairing and maintaining the buildings.
Some aspects went beyond the holding of an investment: providing homemade and purchased food and drink; providing household goods like furniture, towels, linen, bikes, games, books; the extensive help and assistance to guests; and organising and participating in BBQs and events.
Other aspects were a mixture of both investment and additional services: a pool alone was closer to an investment, but this particular pool was heated, cleaned, and came with furniture; whilst a normal a garden would be closer to an investment, this garden was exceptional and required substantial input.
Looking at the business in the round the FTT found that the business fell on the “non-mainly-investment side of the line”, but only just.
This distinguished it from other actively managed holiday lettings businesses and therefore BPR was available.
The Future
This case may be appealed by HMRC to the Upper Tribunal (UT) in which case the FTT’s decision could be overturned (as happened in
Pawson).
HMRC have challenged many claims for BPR on holiday lets. Those seeking to claim BPR in such cases should be aware of the risk of significant litigation costs in future.
The FTT cannot set a binding precedent, but if this case or a similar one comes before a higher tribunal or court, then taxpayers with holiday lets may finally have clearer guidelines on when their additional services will trigger BPR.
