By Simon Misiewicz
Article relevant to the tax year 2018/19
Are you under the impression that holiday lets would benefit from Business Assets Rollover (BAR) / Business Property Rollover (BPR) when you die to avoid IHT?
Why invest in holiday lets or serviced accommodation
We have spoken previously of why property investors choose serviced accommodation / holiday lets as a strategy in a previous article. In this article we not only highlighted the advantages of being able to charge more per night, providing greater income. We also highlighted that you could claim capital allowances against your employment income.
Not only that but the profits from holiday lets would count towards your pension contributions allowances unlike standard buy to let property investments. See the more details article on this subject
Furthermore we spoke about the highs and lows of actually running a holiday let or serviced accommodation from a practical sense in our other article.
Revenue & Customs Commissioners vs personal representatives of Nicolette Vivian Pawson (Deceased) 2013 – Impact on IHT
If you have not read this case, do not fear as we will discuss this case and how it may affect you as a property investor, especially if you have serviced accommodation or holiday lets in your portfolio.
Our team of property tax experts are on hand to best advise our clients on how to avoid these issues.
This is the latest in a long line of cases on the subject of whether or not a business is wholly or mainly an investment business for the purposes of BPR for inheritance tax purposes.
However, because this case concerns inheritance tax, these people are only potentially affected. Those estates which are currently in the process of administration, where a claim for BPR has been made on a holiday letting, and relevant property trusts that may be approaching a principal or proportionate charge event.
HMRC had previously allowed claims on such properties where the letting was short term and the owner, either personally or through an agent, was substantially involved with the activity. From that time HMRC published new guidance which suggested that, in their interpretation, it was necessary to provide a higher level and type of services in order to qualify for business property relief (See IHTM25278).
The property concerned is a bungalow on the Suffolk coast. Not only was the historic letting of the property at a low level but minimal additional services were provided. The property was furnished and included a television and telephone but prior to Mrs Pawson’s death it was necessary for holiday makers to bring their own bed linen.
The first tier tribunal had concluded “no doubt that an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading. The need constantly to find new occupants and to provide services unconnected with, and over and above those needed for the upkeep of the property as a property lead us to conclude that no postulated intelligent businessman would consider such a property as Fairhaven to be correctly characterised as an investment.”
Justice Henderson in his decision in the upper tribunal seemed to focus on the other previous Court of Appeal decision in George and the comments of Lord Justice Carnwath at paragraph 27. Justice Henderson has held that, based on his interpretation of the comments of Lord Justice Carnwath, the letting of holiday accommodation cannot qualify for business property relief.
Holiday lets does not satisfy the condition to be considered a business for IHT purposes
Specifically, Justice Henderson states at paragraph 46 that he was unable to accept “that a holiday letting business is inherently of such a nature that it falls outside the scope of a “normal” property letting business”. He expands on this in paragraph 49 when he states that “the need to find new occupants is on any view an activity which falls on the investment side of the line”.
Therefore, whilst Justice Henderson found in favour of HMRC, it was not on the basis of HMRC’s view of the legislation as published in their manuals but instead that the letting of holiday accommodation is merely the exploitation of a property asset in such a way that any income generated by it can only be investment income.
Taken to its ultimate conclusion, the interpretation of the legislation used by Justice Henderson would call into question entitlement to BPR for other types of holiday accommodation which has never previously been disputed by HMRC. In many guest houses, for example, and even hotels, the value of the property itself and the demands of maintaining it will far outweigh the housekeeping and catering services provided.
Further, HMRC has not yet had a chance to digest the decision in order to reassess its interpretation of the legislation. If the activities in connection with attracting holiday makers to a property, such as running the website, dealing with bookings and all of the changeover work is considered to be part of an investment activity, then it is very hard to see what level of service could ever be provided in order for such a property to qualify for business property relief. Therefore the only properties that would be likely to qualify would be those where there is a wider range of other activities and services such that overall a trade is established.
For example, such a trade might be a working farm holiday or other type of holiday where the accommodation is only part and parcel of a much wider fully integrated experience. Such businesses are fairly rare and do not represent the majority of businesses providing self catering holiday accommodation.
Provide additional services to qualify for BPR for IHT purposes
In our opinion unless you are providing additional services to your clients then there will be no allowance for BPR to mitigate your IHT. Indeed, there could be a question of how these types of assets will be considered in view of Section 24 mortgage interest relief. Moreover investors that sold a holiday let only to buy another one as a replacement would be allowed to mitigate Capital Gains Tax (CGT). If the case above brings that into question, HMRC could seek more tax from investors, not just IHT but CGT and income tax.
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