Furnished Holiday Letting (FHL) – A Business?
It might be obvious to most people that running a furnished holiday let business where a property owner has one or a number of cottages or other properties that they let on short-term holiday lets is a business. It is carried on for a profit, one of the key requirements, otherwise why else would the property owner do it!
However, HM Revenue and Customs (HMRC) have consistently taken a contrary view, particularly in as far as claims that furnished holiday letting businesses are a business for the purposes of inheritance tax (IHT).
Why do the Revenue take this view?
There is a valuable relief available to business owners in respect of the value of their business assets on their deaths for IHT purposes. The relief is known as business property relief (BPR) and presently runs out of rate of up to 100% of the value of the asset. In other words, if BPR applies the taxable value of the asset for IHT purposes is zero. This is a valuable relief when one remembers that IHT is presently charged at 40% and the value of any property used for a holiday letting purposes is likely to be of the order of £100,000 or more.
There is an exception to the BPR relief, which says that an investment business or one which consists mainly or wholly of the holding of land or investments does not qualify for relief.
HMRC have therefore argued that a furnished holiday letting businesses is nothing more than a business that derives its income wholly or mainly from the letting of land. However, this is contrary to the facts in those cases where the owners in fact include a large number of services over and above those which would be provided by a normal landlord. These include services such as providing linen, cleaning services, food, garden and recreational facilities and often tourist information. In some cases the services offered by many FHL owners exceeded or equal the services offered by many hotels (a business that would normally qualify for BPR).
HMRC have consistently denied claims for relief on such businesses and their assets, but the recently decided case of Pawson has gone against them. In that case, a joint owner of a FHL property died and her executors claimed BPR in respect of her interest in the property concerned. HMRC sought to deny the relief and the matter was recently argued before the First Tier Tribunal where HMRC lost.
Who may this help?
This is only a First Tier Tribunal decision and therefore may not be followed or of course may be appealed by HMRC. However it does give hope to those who operate FHL businesses that they will be eligible for BPR. This may be particularly important to farmers who have diversified into holiday letting, where in the past it was thought that neither agricultural property relief or BPR would apply to the value of the holiday letting business that they run.
If you require further help or advice as to the steps you should take to help ensure that your furnished holiday letting business will qualify for BPR please contact the Private Client Team at Stephens Scown at our offices in Exeter, St Austell or Truro.