Business Property Relief and Furnished Holiday Lettings: Personal Representatives of Grace Joyce Graham (Dec’d) [2018] UKFTT 0306 (TC)

Business Property Relief (“BPR”) is an attractive tax relief for taxpayers with business interests, offering either 50% or 100% relief from inheritance tax (“IHT”) on the value of the business assets if certain conditions are met.

An interest in a business or a company will not, however, qualify for BPR if the business carried on by the entity consists wholly or mainly of making or holding investments.

The use of the terms “wholly or mainly” in the IHT legislation has given rise to a significant amount of case law over the last few years as HMRC and taxpayers argue over where the line should be drawn between business assets which qualify for BPR and those that do not.

Much of this case law has focused on the applicability of BPR to furnished holiday lettings. The tribunals have long maintained the position that furnished holiday lettings will rarely qualify for BPR, as the value of the business is derived from the exploitation of a holding in land. HMRC’s own guidance, however, provides that this position may be reconsidered where the additional services provided to holiday-goers by the business are such that the business can no longer be said to be one of wholly or mainly holding investments. This would allow a successful claim for BPR to be made. 

Notwithstanding this concession, HMRC and the tribunals have set a particularly high bar for the level of additional services required. 

In previous decisions, the provision of cleaner and caretaker services, telephones and televisions in properties, linen and towels, wi-fi, and use of the facilities of a local hotel were deemed insufficient to prevent the business from being treated as an investment business. In each case, the tribunal concluded that the services were primarily offered to maximise the income which could be derived from the investment in the land. 

Against this background, the First Tier Tribunal’s recent decision in Graham appears to provide a welcome, albeit limited, shift in the tribunal’s position. 

In Graham, the deceased tax payer owned a furnished holiday letting business in the Isles of Scilly which was managed on a day-to-day basis by her daughter. This case was firmly in the mould of previous furnished holiday lettings cases but, it was noted, the business provided an even greater level of additional services than those previously considered.

Among the additional services were the use of a solar-heated swimming pool, a sauna, a games room, a bike-hire facility, a large ornate garden, and homemade marmalade and other provisions. In addition to these, the tribunal noted the level of personal care lavished upon guests by the manager of the business as a service which distinguished the business from others which had, unsuccessfully, applied for BPR. 

The tribunal concluded that the business was more akin to a family run hotel than an investment property let out during the holidays, and allowed the claim for BPR. Although this demonstrates that the “additional services” test may be met to allow BPR to be claimed on furnished holiday lets, the test requires a high threshold to be met and, as the tribunal noted in its decision in Graham, only an exceptional letting business will avoid the restriction on businesses wholly or mainly holding investments. 

Despite the tribunal’s acknowledgment that there is a high standard against which BPR claims are assessed, it has recently been announced that HMRC are appealing the decision to the Upper Tribunal, and it may be that the Graham case is brought back in step with previous case law. 

Even if the Upper Tier were to uphold the First Tier Tribunal’s decision, however, the judgement was so specific to the facts of the case that it would be difficult to use the Graham case as a basis on which to reach a firm conclusion on whether BPR will be available in other furnished holiday let claims.