Tax Partner Newby Castleman LLP
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Business property relief: Not such a Scilly decision?

16th Jul 2018
Tax Partner Newby Castleman LLP
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A recent decision by the First Tier Tribunal has thrown the vexed question of business property relief (BPR) on property lettings businesses.

In the Personal Representatives of Grace Joyce Graham (Deceased) v HMRC [2018] UKFTT TC06536, the tribunal concluded that a holiday letting business on the Isles of Scilly qualified for BPR. The question was, how much of the overall business related to the use of land and how much related to other components, such as services provided or onsite facilities?

The issue is, of course, not a new one and has been considered before the courts on several occasions. HMRC v George [2004] 75 TC 735 considered the provision of additional services to guests leasing pitches in a static caravan holiday park.

It was held that the fact that a necessary component of the business was the use of land should not mean that business property relief is not available in respect of the activity, and that the mere fact that services or facilities might be required by the lease and their cost included in the rent did not mean that they lost their character of services and became part of the investment holding activity.

This was something of a departure from previous decisions, in which the provision of land – the investment element – largely predominated against any service element. In George, it was recognised that a significant part (around 70%) of the lettings income from caravan pitches was used on providing other services and facilities within the park, such as running a club for residents and non-residents. Stressing the need to look at the overall context of the business, the Court of Appeal therefore considered that the business was not “mainly” one of investment.

The case also introduced the concept of a “spectrum” of property lettings business, with the exploitation of land by the granting of a tenancy at one end and the operation of a hotel or shop at the other. Whilst a caravan park was accepted as being outside the scope of a “normal” property letting because of the relative importance of the provision of other services, this was not considered to be the case for a holiday cottage lettings business where the services provided were of a “relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property” (HMRC v Pawson (deceased) [2013] UKUT 50 TCC).

Overcoming the proposition that holding land to obtain an income is generally an investment activity therefore takes something out of the ordinary: “normal” services such as the provision of cleaning between lettings, the provision of heat, light, etc will not be enough.

Against the background of the Pawson decision, the taxpayer’s success in Graham is perhaps surprising, given the number of similarities between the two cases: both involved the provision of furnished holiday accommodation, and in both cases additional services were provided to guests, such as a welcome pack, bed linen, towels, cleaning, power, a telephone, television and assistance in emergencies.

Both businesses were actively managed and considerable time was spent redecorating and maintaining the let property, advertising for tenants, taking bookings etc. The question in both was whether the business was mainly one of holding investments?

The factors which tipped the balance in favour of the taxpayer in Graham were the extent of the additional services provided, such as homemade food and drink, bikes, games room, the provision of a pool, sauna and gardens, together with the high level of personal assistance provided by the owner. These were more akin to the services provided by a hotel (and indeed the business had at one stage comprised a country house hotel, and bed and breakfast accommodation continued to be provided on an occasional basis).

The wide range services provided, and the man hours involved in providing them, enabled a distinction to be drawn between a “normal” lettings business, such as that in Pawson, and the “exceptional” situation in Graham where what was being provided went beyond a mere place to stay.

Owners of furnished holiday businesses (and their advisers) will no doubt rejoice at the Graham decision and the blow it deals to HMRC’s firmly held view that services provided to guests are minor and ancillary compared to returning a profit from land. However, a couple of notes of caution: firstly, this is a first tier tribunal decision and is therefore not binding. Secondly, in the judge’s own words, the position in Graham was exceptional and only just fell on the mainly-non-investment side of the line. Anyone expecting to see a relaxation in HMRC’s stance on this topic is likely to be disappointed.

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