It feels as though every year HMRC have gone to court to deny owners of such properties entitlement to a valuable inheritance tax relief called “Business Property Relief”.
This is a very valuable relief that can prevent a 40 per cent inheritance tax charge arising on holiday properties.
The tax savings can run into thousands of pounds on a typical holiday let typically worth £250,000 plus. This explains HMRC's urgency to squash these claims each time they pop up.
The latest round in this debacle between taxpayer and HMRC was won by the executors of the late Grace Joyce Graham. While they may not have delivered the knock out blow, some commentators are now saying that it is a breakthrough case which ends a long running series of victories by HMRC.
However, with an inheritance tax consultation expected before the next Budget, it is possible that HMRC will, once again, move the goalposts if other taxpayers try to follow the late Mrs Graham's example.
So what was the issue? There is a prominent clause in the inheritace tax legislation that seeks to deny Business Property Relief if a “business” i.e. the holiday let “consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments”.
HMRC will always contend that taxpayers own holiday lets are investments in the underlying land and not an income-generating entity like a hotel,or B & B accommodation. So many cases have failed on this very specific point, mainly because the business owners were unable to expand on how they derived their income from the letting. Typicall, this would all be classed as rental income.
However, in the Graham case, the taxpayer challenged this assumption that “holding land to obtain an income is essentially an investment”. They argued that the late Mrs Graham's customers were provided with many other services – not just the actual rental of the holiday let. She provided a pool, sauna, and bikes to hire and was on hand to give a very personal and attentive service – akin to staying in a hotel or B & B.
As a result, the First Tier Tax Tribunal agreed with the executors that the land was not “held mainly for investment purposes” and granted BPR to the late Mrs Graham's estate.
After a long run of taxpayers losing at the hands of HMRC's very narrow interpretation this tribunal decision offers a ray of hope to the many Yorkshire based holiday let owners as they seek to pass on their holiday let “businesses” to the next generation without suffering a 40% charge to IHT
What the case seems to be telling holiday let owners is the provision of high quality, additional services provided in person will help them establish a bona-fide claim to BPR when they come to pass on the business to the next generation.
The provision of these extra services needs to be on a par with a competing B & B or small hotel in the vicinity. By doing this you will significantly strengthen any future potential claim for BPR – so think outside the box when it comes to additional services and don't fall into the trap of being a meet and greet holiday let owner who sees their customers arrive on the Saturday and then returns the following week to let the cleaners in.
Further cases are now expected on this point of principle, including one involving a livery business.
Nigel Shaw, tax advisor, Garbutt and Elliott