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No IHT relief for holiday lets

Challenging HMRC’s refusal for IHT business relief on holiday accommodation is game of tribunal roulette where the odds are stacked against the taxpayer, as Chris Williams explains.

15th Jan 2021
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A furnished log cabin
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It seems no year is complete without the first-tier tribunal having heard at least one doomed appeal against an HMRC’s refusal of IHT business property relief (BR) for a furnished holiday letting (FHL) business. The latest in this line of lost causes is the Executors of the Late Sheriff Graham Loudon Cox v HMRC (TC07919).

The law

The conditions for BR and the relevant restriction are succinctly expressed in the Inheritance Tax Act 1984 sections 104 and 105.

Section 104 applies the relief where:

  • the whole of the value transferred is attributable to the value of relevant business property, the whole of that value is treated as reduced by 100%; or
  • where part of the value transferred is attributable to the value of relevant business property, that part of the value is reduced by 100%. 

Section 105 defines “relevant business property” which means property consisting of a business or interest in a business, but there is a qualifier in s105 (3):

“A business or interest in a business … are not relevant business property if the business … consists wholly or mainly of ... making or holding investments.”

Key question

This test (in s. 105) has been applied in a number of situations involving property including rented business units, serviced business accommodation, caravan sites and, of particular interest here, furnished holiday lettings. All share a common thread which can effectively be distilled down to a single question:

Does the business amount to little or nothing more than the normal incidentals of property exploitation through letting or do the nature and level of service(s) provided outweigh those normal incidentals?

This question is usually addressed in terms revolving around the nature and extent of facilities and services offered to users of the FHL property.

The most common mistakes in presenting such a case are confusing:

  • facilities provided;
  • tasks undertaken in the course of normal maintenance and marketing of the property; and
  • services to guests.

Facilities

In the Cox case the Judge was presented with a list of items available to guests that included: details of furniture; parking spaces; an exclusive area of the garden; access to grounds; pets and young welcomed in some of the dwellings in the house; sports equipment, TV, DVD player, games and amusements; leaflets and information about nearby attractions; linen, towels gas and electricity included; and a washing machine. The house was advertised as a suitable place for convalescence or base for enjoying activities provided by third parties but not the host.

The list of services provided to guests was not long. Baby-sitting, meal provision and transport were occasionally provided but the services did not amount to a managed holiday experience.

At the time of a local festival, guests were afforded free access to events taking place in the grounds of the house.

Arguments for BR to apply

It was argued that FHLs should be treated in the same way for IHT purposes as for income tax and capital gains tax.

This argument has been tried unsuccessfully before, in the case of Anne Green v HMRC [2015] UKFTT 334 (TC) and in the Cox case the Judge’s decision was the same as that in Green. FHLs are treated as trades for income tax and CGT purposes by specific statutory provision: it would be open to Parliament to provide comparable treatment in IHT but it has not.

This argument is also inconsistent with the specific exclusion from BR of investment activities by s105 (3).

HMRC manuals

The taxpayers made reference to HMRC’s guidance, some of it outdated, but the Judge pointed out that this guidance has no legal force and only gives HMRC’s view of the correct treatment of certain facts.

Depends on the facts

The Judge pointed out that whether BR is available is an “all or nothing” test which does not allow for apportionment between investment and non-investment activities.

The test is one of fact, of which the FTT is the sole judge and superior courts cannot displace a decision of the FTT unless the decision is unsound in law. The majority of decided cases on BR reached no further than the FTT and, while they may be persuasive, a decision at FTT does not set any binding precedent.

Pawson case

Decisions of the upper tribunal, which do bind the FTT, are more important.

The Judge in Cox favoured the rationale set out in: HMRC v PRs of N V Pawson [2013] UKUT 50 (TCC) (Pawson), quoting Henderson J: “I take as my starting point the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity.”

That is the inescapable underlying principle of the line of case law on BR as it relates to the commercial exploitation of land.

Vigne case

One case that is sometimes referred to as offering hope is HMRC v PRs of M Vigne [2018] UKUT 357 (TCC).

The UT declined to overturn the factual judgment of the FTT but Vigne concerned livery provision for horses not holiday accommodation for humans. Vigne is not generally regarded as a good decision on which to base an appraisal of the facts of a case.

Exceptions do not create a rule

The overwhelming message from the trail of mostly failed BR appeals is that any taxpayer is free to try their luck in establishing a case for land use to fall outside the exclusion in IHTA 1984 s105, but the odds are stacked against them in this game of tribunal roulette.

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By Adrian Everton
18th Jan 2021 17:55

I read with interest this article, as my wife and I jointly own a villa in Spain, which is rented out. I monitor all rentals and communicate with the tenants directly, sending keys, info, receiving and agreeing to the rent, although some are referred to us by holiday lettings web sites, to whom we pay commission. We have a bank account in Spain , which is used to pay all the expenses. I arrange the payment of all the outgoings and spend a fair amount of my time, keeping my records up to date and monitoring the situation. Do you think that I/we would qualify for BR? We have an agent in Spain who arranges the cleaning and maintenance of the gardens and I liaise with her for repairs and upkeep.

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