In principle, it’s simple. If you have business assets which are part of your estate when you die, or which are held on trust where periodic Inheritance Tax (“IHT”) charges would otherwise apply, they get 100% relief so long as they have been owned for at least 2 years. There is an exception, however, for any business which consists in “dealing in securities….land or buildings or making or holding investments”. The concept is that investment activity, as opposed to getting your hands dirty and working for a living, does not benefit from the exemption. So clearly owning a building and running a restaurant or hotel from it is on the right side of the line to get Business Property Relief (though very hard work, probably) but owning a building and letting it as, for instance, offices or residential property is not.
Where we come to the grey area is holiday lettings. Are you just renting out property, or are you running a holiday business more akin to a hotel, “bed and breakfast” or holiday camp? HMRC has been taking a more and more restrictive line over recent years, supported by the Courts and Tax Tribunals, and this is illustrated by a recent decision of the First Tier Tax Tribunal, Ross v HMRC [2017] UKFTT 0507. The case concerned 8 holiday cottages and 2 flats, associated with a Hotel, the Port Gaverne Inn in Port Isaac, North Cornwall, originally run by Mrs Ross and her husband. The Hotel had been sold and the cottages retained by the family, but two flats were leased back to the hotel as staff accommodation, and part of the deal was that the hotel continued to provide services to the holidaymakers who rented the cottages, as before. This was important because in a number of previous decisions it had been emphasised that the main difference between an investment business (no IHT relief) and a trading business (100% relief available) in this context was the services provided to holidaymakers: was it more like a rental arrangement, where they were left pretty much to their own devices, with just the normal amenities you get when you rent a holiday cottage, such as clean sheets, cleaning and a few recommendations for local restaurants and attractions or was it more like a full-service hotel? Green v HMRC [2015] UKFTT 0334, in particular, had found against the taxpayer because the level of services was not deemed sufficient to turn a property rental business into a serviced holiday business where accommodation was provided as just part of the package.
In Ross, the facts were more strongly in favour of the taxpayer. Evidence was given that guests of the holiday cottages could eat meals at the hotel, and often did, even being able to order bar meals that were delivered to their cottage, that they had had use of the hotel Wi-Fi, car parking facilities, handyman and laundry room and that one of the reasons guests booked there was because they got a high level of service, over and above what was normally available on a self-catering holiday rental. Nevertheless, after reviewing the previous leading cases on holiday cottages and caravan parks, the Tribunal decided the essence of the business in this case was still renting out land – i.e. cottages – in a beautiful place to stay, rather than providing a holiday experience. The decision may yet be appealed, but the bar, clearly, is getting higher.
