How Inheritance Tax Could Impact Your Leisure Business

During the recent period of instability and increased risk to public health it has become apparent that many individuals and business owners have been thinking about the future for their families and the succession of their businesses. Although this can spark difficult conversations it can be crucial in a smooth transition to the next generation. Inheritance Tax (IHT) planning will be key during this process and whilst many farming businesses may understand their position what about other landowners who run Furnished Holiday Lets or Caravan Parks? Will they get the same relief?

Business Property Relief (BPR) is the most significant relief available for IHT which applies at a rate of 100% to ‘Relevant Business Property’ which includes property consisting of a business or interest in a business. Achieving BPR can provide a key planning tool in reducing a family’s IHT bill.

For many years, owners of Furnished Holiday let trades have found it difficult to gain any IHT relief with very few cases going in favour of the taxpayer. The holding of land is viewed as an investment rather than a trade for IHT where the income derived will largely consist of rental income. HMRC have therefore expressed those businesses of this nature will in general not qualify for Business Property Relief. Whilst this seems very clear cut there have been a small number of cases where such a high level of additional services is being provided, the activity has been considered as non-investment and relief has been obtained. This has left many business owners asking what type of additional services are necessary and to what level of additional services is sufficient?

Unfortunately, there are no easy answers, and the area remains incredibly subjective. Unsurprisingly this has led to increased claims for BPR being made. In most high-profile cases where additional services were being provided (Pawson 2013, Green 2015 and Ross 2017) the tribunals all found in favour of HMRC setting a precedent where the threshold for a holiday let business to be considered trading rather than investment particularly high.

However, a recent case from 2018 (PRs of Graham v HMRC) has given encouragement to taxpayers and provided some understandings of what services are necessary to qualify for relief. Mrs Graham and her daughter demonstrated a level of service way above and beyond what is expected for a normal holiday let business. This included unpacking guest’s groceries, providing golf buggies and bicycles for hire and assistance arranging events and parties such as weddings and anniversaries. Despite being upheld in the Upper Tier Tribunal the courts concluded that this was an exceptional case which ‘just’ fell on the non-investment side of the line.

Furnished Holiday Let owners should consider alternative planning to reduce levels of IHT which may arise on their deaths whilst the BPR on these businesses remains difficult to obtain and subject to interpretation.

What can still confuse many owners is although Furnished Holiday Let’s (FHL) are classed as investment property for IHT they are taxed and subject to the same rules as trading businesses for both Income Tax and Capital Gains Tax. It has been proposed by the Office for Tax Simplification that IHT rules should be aligned with the other taxes where BPR would then become available. Although HMRC have resisted the move to date it is certainly something to keep a close eye on in the coming years.

Those who operate FHL’s as part of a larger farm or Landed Estate and not a standalone business should be aware that BPR can be achieved where the FHL’s are a small part of the single overall trading entity as shown in the ‘Balfour case’. This would also be relevant to Caravan and Holiday Parks who trade in buying and selling Caravans. The taxpayer would need to demonstrate the FHL, or rental aspect of their overall business, is ancillary to the main trade to gain relief. Careful planning would need to be considered particularly in light of a possible change to BPR rules such that undertakings would need to be substantially trading (i.e. over 80%) rather than wholly or mainly trading (over 50%).

Whilst 100% trading businesses will qualify for relief under the current rules, if there is any rental aspect applied you can fall foul of the legistlation if not carefully looked at. If you would like any advice or help with planning we can conducnt an Inheritance Tax review and provide you with clarity and peace of mind.

Written by Callum Somers ACCA

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