Furnished Holiday Lettings – Will You Get Business Property Relief?
Published Autumn / Winter 2013
The ages-old question for farmers is how to get the most profit from their land. In recent years, the answer for many farmers with surplus buildings has been to convert those buildings into small houses or flats which they then let to holidaymakers.
Although clearly this is not a farming activity, so that Agricultural Property Relief from Inheritance Tax (“IHT”) will not apply, in the past it has been hoped that Business Property Relief (“BPR”) would apply instead. Indeed, since BPR provides 100% relief from IHT it is a more useful relief than Agricultural Property Relief, which only covers agricultural value. The case of Pawson v HMRC first raised our hopes and then dashed them.
To qualify for BPR, there must be a “trading business”. Simply benefiting from investments will not count. Renting out land is treated as benefiting from investments; thus a furnished flat which is rented out long-term will not benefit from BPR.
Contrast this with a hotel; again, this is essentially the business of renting out accommodation but so many additional services are provided (breakfast, laundry) there is no doubt there is a trade. Furnished holiday lets fall into a grey area between these two extremes. It has long been known that the more services you provide, the better chance you have of qualifying for BPR. However, where is the line drawn?
Pawson v HMRC was not a farming case but it does illuminate these issues. Mrs Pawson had been a one-quarter owner of a large cottage which overlooked the Suffolk coast. The family used it for three weeks a year, but the rest of the time it was let out, usually for no more than two weeks at a time. When Mrs Pawson died, her executors claimed that her share of the cottage qualified for BPR but HMRC disagreed.
The services which were provided were:
- Cleaning in between visits;
- Heating and lighting;
- Telephone and television.
A small profit was made each year.
At the First Tier Tribunal (the first port of call after HMRC have made a decision), the Tribunal stated that so much effort was involved in letting out and looking after the property that the letting could not be said to be simply “holding an investment”. However, while this certainly appealed to common sense, the decision was against the run of recent cases. HMRC appealed to the Upper Tier Tribunal.
The Upper Tier Tribunal acknowledged that there is a “spectrum” of cases with a rental property at one end and a hotel at the other and that it will be a matter of fact in each case whether there can be said to be a “trading business”. They first decided that the Pawson case fell at the “rental property” end. There simply weren’t sufficient services divorced from the property itself to qualify as a trade. However, the judge then went on to say:
“I am unable to accept …that a holiday letting business is inherently of such a nature that it falls outside the scope of a “normal” property letting business…On the contrary, I consider such a business to be a typical example of a property letting business, albeit one of a fairly specialist nature…”
On this interpretation, even Travelodge should be worrying about qualifying for BPR.
There is still an argument to say that if the holiday lets are a part of a larger business, such as a petting farm or pony-trekking, then they may still qualify for BPR. The Balfour case of 2010 supports such an argument. In this case, a large part of the income of the Balfour estate came from holiday lettings and it was acknowledged that by themselves they did not qualify for BPR.
However, they formed part of a larger estate which had the usual mixed use of a Scottish landed estate – farming, forestry, shooting etc. It was held that the estate as a whole did qualify for BPR.
Therefore, if you have furnished holiday lets on your farm, you should try to ensure they form part of a wider holiday/leisure experience; in this way they may still qualify for Business Property Relief.