05 July 2018

The Background

Recent cases on Inheritance Tax relief on holiday cottage businesses will have left many owners concerned that the chance of securing Business Property Relief (BPR) on such a business is very slim unless an unfeasible number of additional services are also offered.

First came the case of Pawson, which involved only a few additional services. To many practitioners, it was no surprise that this case was lost. The next case was Green followed then by Ross, each showing a higher level of additional services than the case that came before.

In the last case Ross, there were eight Cornish holiday cottages and two flats, with significant additional services including an on-site handyman. That the taxpayer lost left some advisors wondering whether Inheritance Tax relief could ever be available on holiday cottage business.

The HMRC challenge

Perhaps emboldened by their victories, HMRC challenged a claim by the executors of a Mrs Graham to BPR on a holiday complex on the Isles of Scilly. There were four flats or cottages, together with a couple of guest bedrooms that were occasionally used for B&B accommodation. Critically, there was a long list of services such as swimming pool, sauna, BBQ, games area, laundry, a golf buggy available for hire, a welcome pack, an exceptional garden, and extensive help and guidance from the deceased’s daughter to assist people through their stays.

Mrs Graham had previously run the business as a hotel and there was some discussion in the case about the differences between the business as it was operated by Mrs Graham before her death, and that of a country house hotel (where BPR would without question be available). HMRC accepted that the main difference was that there were fewer guests and meals were not provided.

The judge then listed those services provided by Mrs Graham which were in common with a hotel, those which were offered in addition to that normally provided at a hotel (eg bike and buggy hire, sauna, games and a large garden) and those which were not included but would normally be found at a hotel (such as the daily making of beds and cleaning and tidying, and room service and meals). His careful conclusion was that although the similarities and differences did not point to a clear conclusion that the business lay at the hotel end of the spectrum (in other words clearly eligible for BPR), neither did they point in the other direction.

He also carried out an appraisal of how much time was spent by Mrs Graham's daughter, and other staff, on the basic maintenance and management of the property/lettings (in other words work on the property investment activity) and the time spent in providing additional services. He concluded that the additional services side predominated (but only by a small margin).

The judge was careful not to take any single factor as determinative of whether relief was available, but looking at everything in the round, he concluded that this was an exceptional case which ‘just falls on the non-mainly investment side of the line’. The services provided more than balanced the mere provision of a place to stay. He suggested that an intelligent businessman would view it more like a family run hotel than a second home let out in the holidays.

What does this mean?

So finally, we have a case which stems the tide of taxpayers losing claims to BPR on holiday cottage businesses. But how much comfort can be found in the case? As the judge observed, the case was exceptional. As well as the additional services, there was a high level of personal care, which distinguished it from other ‘normal’ actively managed holiday letting businesses. Perhaps most encouraging for taxpayers is that the case wasn't lost; had it been, it would be difficult to see how any operators of holiday cottages could ever have any confidence of securing BPR.

If HMRC do not successfully appeal the case, then holiday cottage business owners now have a case demonstrating the very high level of additional services and personal care required to give some prospect of BPR. How many businesses can reach that level is an open question.

How can Burges Salmon help?

For more information on this, please contact Tom Hewitt.

Key contact

Tom Hewitt

Tom Hewitt Partner

  • Private Wealth
  • Head of Estates and Land
  • Head of Food and Farming

Subscribe to news and insight

Burges Salmon careers

We work hard to make sure Burges Salmon is a great place to work.
Find out more