A First Tier Tax Tribunal case on Business Property Relief for IHT on a complex of 8 holiday cottages in Cornwall has confirmed the difficulties in securing relief on furnished holiday lets.
It was once the position that claims for Business Property Relief (BPR) on furnished holiday lets required merely a significant number of additional services to be offered. This was enough to show that the business was trading (where BPR would apply), rather than simply an investment business (no relief). But the last five years have seen the cases of Pawson and Green which indicated that the trading bar is set even higher than previously thought. The more recent case of the Executors of Marjorie Ross v HMRC provides further confirmation on the difficulty of securing relief.
Mrs Ross owned eight Cornish holiday cottages and two flats which were run, along with a property in Weymouth, as the Green Door Cottage Partnership. The Cornish properties were situated next door to a hotel which Mrs Ross ran until 2002 when she sold it. After the sale the new owner agreed to provide certain services to the Green Door Cottage guests and it was these additional services, being more akin to that provided to hotel guests, which formed the basis of the executors' arguments for BPR.
Further additional services included an on-site handyman, a laundry room, BBQs, fishing nets, wood burning stoves and logs. Mrs Ross' daughter was also personally present at the properties at least one day per week to welcome guests. It was, however, noted that the holiday cottages were described as "self-catering" in marketing literature, brochures and on the website.
The judge emphasised the fundamental difference between self-catering accommodation and fully serviced apartments/hotel accommodation. In short, it seems that relief would only be available if the additional “trading” services outweighed the passive "investment" activities of letting property. This is very difficult to achieve in most cases where the primary activity is the letting of property with only subsidiary additional services.
So a holiday camp, where the activities are more important than accommodation might qualify. Or a shoot which offered accommodation to guests might also fall the right side of the line.
In many cases therefore IHT relief will be an impossible dream. So what can an owner do to avoid significant IHT on their estates? CGT holdover relief is available on furnished holiday lets and so timely lifetime gifts with holdover relief should be considered. Provided the owner survives seven years from the date of gift (and avoids the pitfalls of reservation of benefit) the properties can be passed to the next generation free of IHT.