We have previously covered the idea of furnished holiday lets (FHLs) as a means to reduce inheritance tax (IHT) over 7 years ago. The principle being that a trading business qualifies for business property relief (BPR) on death i.e. no inheritance tax payable on business assets (the idea being that the government wants the business to continue and people keep their jobs when an owner dies).
The business of running an FHL in connection with BPR and IHT has been visited by HMRC on a number of occasions over the years and is worth a revisit. We have also said that to qualify you must run the FHL as a true trading business.
In tribunal cases, HMRC v Powson (2013), HMRC v Green (2015) and HMRC v Ross (2017), it was found that really an investment had been made in property and land. Rents were received but they were classed not as trading businesses but as investments in land and property and therefore, do not qualify for BPR and therefore IHT was payable.
More recently, in HMRC v Graham (2018) – the argument for FHLs to attract BPR was expended with a whole new set of additional circumstances in connection with a “trading business” such as:
It was a farmhouse on the Isles of Scilly with 4 X self contained holiday apartments. The personal representatives of Graham argued that it was a legitimate trading business due to:
The Tribunal ruled that this was a trading business and in fact, in our opinion, ran more like a holiday campsite. It ruled that these were exceptional circumstances to qualify for BPR.
As we have always said, if you buy, own or run a furnished holiday let or a furnished business let, you must run them as a trading business and not simply as an investment for rent on land and buildings.