The First-tier Tribunal decision in Damian & Emma Horner (TC02498) was published on 15 February 2013. The case dealt with the availability of business asset taper relief (BATR) on the disposal of a property which was purchased for the purposes of a furnished holiday let business.
Although taper relief was repealed when entrepreneurs’ relief (ER) was introduced in April 2008, the points at issue are still relevant, and this case is also useful in to highlighting some important differences between these reliefs.
In September 2004, the couple bought a property in County Antrim which they intended to use as a furnished holiday let. The property was first let in the week commencing 9 July 2005, and in the first twelve months was actually let for 64 days including Saturday 8 July 2006, which was the first day of a 14 day let. The last letting ceased on 9 December 2006 and the property was sold in June 2007 for a large gain.
In order to get favourable capital gains tax treatment the furnished holiday let needed to form part of a trade. Broadly speaking a furnished holiday let may be treated as a trade for income and capital gains tax purposes where it is:
- Available for letting for 210 days (140 days)
- Let for 105 days (70 days)
- Not let for longer term accommodation for more than 155 days
The days in brackets applied before 6 April 2012.
The case turned on whether the property was let for 70 days in a 12 month period. The couple argued that although the property was occupied for only 64 days in the first 12 month period to 8 July 2006 it was let for more than 70 days because 8 July was the first day of a 14 day letting period (i.e. they could count the subsequent 13 days too). This argument relied on their interpretation of the terms ‘letting’ and ‘occupancy’, on the basis that the former refers to a single act and the latter to a period of time. Furthermore, they argued that if they had prepared a rental statement on 8 July 2006 they would have brought into account the whole of the rental for the 14 day let starting on that day.
HMRC argued that ITTOIA 2005, s 324 is clear in referring to the relevant period as the “12 months beginning with the first day in the tax year on which it is let” and “12months ending with the last day”.
The tribunal decided that the couple’s interpretation must fail because the terms of s 324 are clear. Moreover, the fact that the final 14 day letting would be brought in for accounting purposes does not affect the day count required in the legislation. Consequently, the property did not qualify as a business asset for 2005/06. Although it was accepted that it did so qualify in 2006/07, the property was not a business asset throughout the period of ownership, so full BATR was not available even thought it had been owned for the required two year period to claim 75% relief.
Although taper relief has been repealed, this case may have relevance for the availability of ER. Under taper relief, the whole period of ownership was taken into account, with an apportionment where an asset qualified for BATR for only part of the period of ownership. For ER, however, the business must qualify only for the 12 months up to disposal. Except where the disposal is treated as a disposal associated with a material disposal, any period of non-business use of the asset is ignored.
A crucial distinction between BATR and ER is that in relation to the former, relief was available on the disposal of a business asset, whereas with ER there must be a material disposal of a business asset. In the context of ER, the first question is always whether the holiday letting business qualifies as a trade – and it is here that the day count referred to above is relevant – and the second question is whether the disposal in question is a material disposal. This might mean that if an individual has a number of furnished holiday let properties, the disposal of one property may not qualify for ER, whereas he could, in the past, have claimed BATR.
Where an individual sells a furnished holiday let property the ER position must be considered very carefully.
In addition, practitioners should be aware that even where the above stated day count tests are satisfied so that the furnished holiday let qualifies as a trade for the purposes of income tax and capital gains tax, the property may not qualify as a trade for the purposes of inheritance tax and business property relief. See the following link for more details.