A line of cases have considered what amounts to business property relief under s105(3) where a business is not a relevant business if it "consists wholly or mainly for one of more of the following, that is to say dealing in securities, stocks or shares, land or buildings or making or holding investments".
This implies three questions for owners of furnished holiday lets.
- Does the furnished holiday let amount to a business? (Usually, yes.)
- For investment activities and trading activities, are the owners running two separate businesses or a single composite business?
- Assuming in the case of furnished holiday lets that the owner is running a single business, does it comprise wholly or mainly investments?
In two of the pertinent cases concerning caravan parks (IRC v George) and grazing agreements (McCall v RCC), the question of what amounted to wholly or mainly investments was described as "a spectrum at one end of which is the exploitation of land by granting a tenancy coupled with sufficient activity to make it a business, which may be activity in granting tenancies rather than activity in relation to the tenancy once granted. At the other end of the spectrum, while land is still being exploited, the element of services means that there is a trade, such as running a hotel or a shop from premises owned by the trader".
Furnished holiday lets usually involve the provision of services to some degree but it is clear that active management of property does not necessarily stop the business property comprising wholly or mainly of investments.
In the recent case concerning a claim for business propert relief (BPR) by the executors of the late Mrs Pawson on a let holiday cottage in Suffolk, HMRC disputed the claim. Its main grounds were there as the business was mainly one of holding the property as an investment, it did not qualify for BPR. The services provided were rather minimal but nonethelss the First-tier Tribunal concluded that an intelligent business person would not regard owning holiday letting property as an investment because it was an active operation.
The Upper Tribunal disagreed, concluding that owning and holding land in order to obtain an income would generally be characterised as an investment activity.
Further, the investment can be actively managed e.g. the property and grounds maintained and marketed, whilst still retaining its character as an investment, as these sort of activities are directed at maintaining or enhancing the capital value of the property and obtaining a regular income from its lets.
This article originally appeared in Private Client Adviser on 17th January 2013.