Inheritance tax relief of Furnished Holiday Lets receives another blow

A recent tax case before the First Tier Tribunal has poured further doubt on the availability of inheritance tax relief on properties let as furnished holiday accommodation (FHLs).

Business Property Relief (BPR) can provide 100% relief against inheritance tax where a business activity is deemed to be “wholly or mainly trading”. If a business activity is predominantly investment rather than trading, no relief will apply to the assets involved. Over recent years the tax cases of Pawson and Green, which found in favour of HMRC, set a high bar for the level of ancillary services thought to be needed for FHLs to qualify as trading and therefore for BPR to apply.

Now, the recent Ross case (Executors of Marjorie Ross v HMRC) appears to have all but closed the door on the availability of BPR for FHL businesses, even where apparently high levels of services are provided to guests.

Mrs Ross died in 2011, when she owned eight holiday cottages and two flats in Cornwall, along with a property in Weymouth, in a partnership business. Mrs Ross’ share of the business was valued at between £1m and £1.5m.

The FHLs were adjacent to a hotel which Mrs Ross ran until 2002 when she sold it. After the sale the new hotel owner agreed to provide certain services to the guests of the FHLs including dealing with enquires and bookings, accepting left luggage, delivery of bar meals, discounts in the hotel and ordering milk and newspapers. The taxpayer’s representatives argued that BPR should apply as the business provided services “more akin to a hotel than a typical self-catering holiday”.

HMRC contended that the properties were marketed as self-catering accommodation and while the services were more extensive than those considered in previous decisions, those services were not enough to count as the greater part of the business, i.e. to tip the business over threshold of being one of mainly trading, rather than one of mainly holding investments. The Judge agreed with HMRC’s argument.

Owners of FHLs will need to seriously consider their position and succession plans in light of this decision. A lifetime gift of FHL property may become a more attractive option, as such a gift may still qualify for Capital Gains Tax holdover relief. Where a FHL business can be integrated into a wider trading business this may also be helpful, although this approach is not without its own dangers.

An appeal in the Ross case may be forthcoming, but we strongly urge FHL owners to consider their position alongside their tax advisors in light of this decision.

For more information or any advice, contact one of our dedicated Leisure team today.