Business property relief, inheritance tax, and holiday homes

In the last couple of years, there has been a growing number of claims to HMRC for business property relief on holiday homes.

 

In this article, Panthera presents a summary of:

 

• what inheritance tax is,

• what business property relief is, and

• whether any holiday home owners have made successful claims for business property relief on their holiday homes.

 

What is Inheritance Tax?

 

Inheritance tax is paid on the estate of a person who has recently passed away. An estate is the value of all the property, possessions, and cash held by that person minus the value of all of their liabilities (outstanding mortgage, outstanding loans, and so on).

 

Inheritance tax is paid on the value of an estate when it is bequeathed to other people if the value of the estate is greater than £325,000, unless someone passes their estate onto their spouse or civil partner.

 

Inheritance tax is fiendishly complicated – we couldn’t possibly do it justice in one article. We’ll do a big one on it soon. Suffice to say however that business property relief can reduce the value of an estate and that’s why many people want to use it to bring down any potential inheritance tax bill or to reduce the value of the estate to under £325,000.

 

What is Business Property Relief?

 

Business Property Relief (also called business release) is given at either 50% or 100% of value of the business assets contained in a deceased person’s “estate” which can be passed onto someone else.

 

100% relief is given on either shares of or interest in in an unlisted company. 50% relief is awarded if:

 

• the shares being bequeathed hold more than half of the voting rights in a listed company

• machinery, buildings, or land were owned by the person who has passed away and the machinery, buildings, or land were used by a business in which they were a partner or over which they had control

• machinery, buildings, or land held in a trust and used by a business

 

The relief is only given if the person who has died owned the machinery, buildings, land, asset, or business for two years prior to their death.

 

Recently, there has been an increase in the number of people who are claiming for business relief on an inherited holiday home in attempt to lower the value of the deceased’s estate whether in an attempt to reduce their tax liabilities or to reduce the value of the deceased’s estate under £325,000.

 

The people who are attempting to do this are doing so on the basis that the property in question was being run as a business at the time of the person’s death. However, HM Revenue & Customs (HMRC) have been adamant in recent statements that business relief can’t be claimed for holiday homes. 

 

Have any cases for business relief on holiday homes been successful?

 

Despite their adamant denials to the contrary, a very recent tax tribunal case casts doubt on the certainty of their position.

 

In April 2018, a case was brought to the First Tier Tribunal (FTT) which went in favour of the tax payer claiming business relief on a holiday home. In this case, Mrs. Graham had owned a property in the Isles of Sicily which her daughter, Louise Graham, inherited after her death.

 

That property had previously operated from the name “Carnwethers” and it was a large farmhouse with four self-catering flats inside of it.

 

The Graham family had offered services such as welcome packs, a sauna, and a pool as well as supplies like tea and coffee. Before her mother’s passing, Louise Graham would work throughout the night to make their guests feel welcome by helping them if they required assistance throughout the night.

 

The Graham’s claim for business relief was contested by HMRC on the basis that the property was held as an investment and not a business.

 

After this, the Grahams took their claim to the FTT and, as part of the case, the tribunal carefully evaluated each individual service that had been provided to guests. In the end, FTT decided that the Graham’s property was in fact mainly ran as a business.

 

The Graham’s claim for business relief was accepted because the services they had provided were substantial enough to class their property as a business. The FTT said that that their case was “exceptional” and fell “on the non-mainly-investment side of the line”.

 

While the Graham’s won their business relief claim, the vast majority of claims made are ultimately rejected by HMRC and the FTT. This case highlights the scope of the services that a holiday homeowner needs to provide their guests with in order to stand a chance of winning a business relief claim.

 

While the Graham’s case is the First-tier Tribunal that’s gone in the favour of the tax payer for a long time, HMRC still holds the power to appeal the decision by taking the case to the Upper Tier Tribunal.

 

Do you need tax advice?

 

This is a complicated area of taxation where we would strongly advice that you engage with our accountants to help you present the strongest possible case so that, if your interest in a holiday home meets the requirements given by the FTT judge so that it could be classed as a business rather than an investment, we can help you prove it to HMRC.

 

Contact Panthera Accounting on 01235 768 561 or drop us an email to enquiries@pantheraaccounting.com for help.