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Inheritance Tax and holiday lettings

Readers of my article on inheritance tax (IHT) and business relief in the March edition of Clarity, will (I hope) be pleased to learn that in tax tribunal hearing I described, our clients were successful.

As far as I know, it is the first case involving a holiday accommodation letting business where the tribunal has ruled that it was not an investment and therefore not disqualified from business relief.

By way of reminder, our business concerned a holiday property which was a family-run guest house till 2004. As the holiday market changed, and the demand for small hotels receded, it was converted to become four self-catering units while retaining almost all of the guest house facilities:

  • There was a swimming pool available to all the self-catering guests, which was cleaned daily
  • There was an acre of (beautifully maintained) gardens, with croquet, badminton and other games, as well as a barbecue for guests to make use of
  • Guests could rent (golf-style) buggies to get about in the surrounding country lanes
  • Guest rooms and a lounge were available in the main house, for example for extended families to stay in
  • A special feature was an award-winning system for green management of waste.

The IHT treatment of holiday letting concerns is an unfair anomaly, because elsewhere in the system HMRC treats them as trading not investment businesses. They are taxed as a trade as long as the properties meet certain thresholds for minimum weeks let, while the profits can support pension contributions and disposal of the business is eligible for capital gains tax (CGT) entrepreneurs’ relief. In other sectors, sole traders and partnerships are eligible for 100% IHT relief.

In my view a general rule that businesses in a particular sector cannot qualify for IHT relief is the wrong approach. I have supported this particular case because I felt it was one of the clearest possible examples of a holiday letting business that was not investment. The tribunal agreed with me.

Unfortunately the tribunal was not as bold on the state of the law as I had hoped. I can only assume the judges felt that the facts in our case were sufficient to grant relief, without their having to challenge the judge’s ruling in a higher tribunal, in the case of Pawson, which I still think is unsatisfactory. That ruling, it may be recalled, has enabled HMRC to argue that all manner of additional services and facilities being provided by a business using land are "unlikely to be material because they will not be enough to prevent the business remaining mainly one of property investment."

However, we do know of an appeal on another case which I hope will address further a slightly separate point that our judge picked up from one of the Court of Appeal cases. This is the suggestion that Parliament, in barring from relief a business which “consists wholly or mainly of…. dealing in securities, stocks or shares, land or buildings or making or holding investments” intended that the bar should apply only to a “business more akin to one dealing in and holding securities, shares or properties in a portfolio”.

In other words, despite past cases that have suggested that actively-managed businesses can still be “holding investments”, should the exclusion from business relief for investments properly be applied only to passive holding of investments? If a higher court can be persuaded that this is the way the business relief rules should be interpreted, this would enable many more businesses than currently do so to claim relief against inheritance tax.

Meanwhile, the case we have supported was a gratifying outcome for the daughter in the family who had been running the business single-handed following the deaths of her father and mother, and who ran the whole appeal to the tribunal herself.

Published: 23 May 2018

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May 2018

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Anthony Nixon