Staycations were increasing in popularity even before lockdown, and the scenes of misery at UK airports this summer has only served to increase the attractiveness of holidaying in the UK. With strong commercial reasons for doing so, many land and property owners have diversified into holiday letting to benefit from this captive market.
Amongst many general factors such as business rates, insurance, council letting restrictions and higher overheads for cleaning and consumables to bear in mind, tax is also a key consideration for those with holiday accommodation.
Furnished Holiday Lets (FHLs) that meet the specific criteria of being available to let for 210 days in a year, which are actually let for 105 days in a year, and where there are no period of longer term lettings may benefit from additional tax reliefs. These reliefs are available because there is a perception that holiday letting is riskier and more time intensive than long term letting. As a result, qualifying properties may benefit from tax reliefs such as a full mortgage interest deduction, capital allowances for fixtures and fittings, a reduced Capital Gains Tax rate on sale or gift of the property and the possibility of deferring gains on a gift of the property.
However, these income tax and Capital Gains Tax reliefs are not necessarily mirrored in the Inheritance Tax treatment of holiday lets and the recent case of The Trustees of the L Batley 1984 Settlement v HMRC highlights that even in circumstances where services are provided alongside the accommodation, Inheritance Tax Business Property Relief (BPR) is by no means guaranteed.
The case concerned a claim to the Inheritance Tax relief by the Trustees on blocks of aparthotels in Harrogate and York held within a company called The Lawrance. The fact that the aparthotels were operated as a business was never in doubt; the properties were managed commercially and along recognised business lines. However, for BPR to be available, the business needed to be one that was not mainly an investment business. In other words, the business needed to be one that involved additional services above and beyond the provision of accommodation.
The simplest way to think about a BPR claim is to imagine a sliding scale. At one end of the scale, there is a long term let which has had the same tenant for 10 years and requires no real input from the owner beyond arranging repairs and insurance. This is an investment business and BPR is not available. Inheritance Tax might be charged at 40% of the value of the property on the death of an individual owner.
At the other end of the scale is a 5* hotel where there are waiters, reception staff, cleaners, night porters and all manner of other spa and leisure staff who are wholly committed to a guest having the most luxurious and comfortable stay. It is this additional level of service input that shifts the business into the realms of BPR, which for an individual, can involve saving 40% in Inheritance Tax on the value of a hotel or qualifying holiday let.
Holiday let properties and services that fall somewhere into the middle of this scale are harder to assess with any certainty on whether BPR will be available, and many rural cottages, with hot tubs, beautiful welcome packs, fresh eggs and home baking fall into this middle ground of uncertainty. The services provided need to move the property into the hotel half of the scale, but there are no tick box criteria that ensure relief is available if every item is provided. The ever-growing body of case law emphasises how fact-specific each claim is, and how closely HMRC will examine BPR claims.
For The Trustees of the L Batley 1984 Settlement, they considered sufficient services were provided for BPR to be in point, and their business manager went to some length to describe the reception services (broadly within office hours only), additional linen and cleaning that could be purchased separately and the café services at one property. However, there was insufficient paperwork to support these claims and the booking terms and conditions did not match the verbal evidence provided and that the facts were “over-egged”.
The Tribunal findings summarise the services provided:
“In summary, we find that on the investment side of the spectrum are the activities such as marketing, benchmarking, pricing, bookings, making the apartments ready for guests, dealing with complaints and requests, maintenance, repairs, insurance, and business rates.
On the non-investment side of the spectrum are the welcome pack, the provision of cleaning if requested, linen, towels, shower gel, furniture, white goods, DVD player and TV, Wi-Fi, food and the ability to purchase extra packages.
We accept that some aparthotels, and we have stayed in some such as Staybridge Suites, would be categorised as providing services with ancillary occupation of the accommodation.
However, looked at in the round, the non-investment activities of The Lawrance whether looked at individually or together, are not that. They do not take the business over the line into the non-investment side of the spectrum.”
Landowning and farming clients who operate holiday lets as part of a bigger overall business should review the services provided on a regular basis, and also the overall balance of business streams operated together. Care should be taken to ensure that, for example, converting agricultural cottages into holiday lets does not negatively impact the overall Inheritance Tax profile of the wider business.
If you have any questions regarding the above or any general tax questions, please get in touch.