Improving chances of a break from tax for holiday property

WHEN looking at the potential exposure to inheritance tax and the reliefs available to mitigate it, a very valuable and generous allowance is Business Property Relief (BPR). If BPR is due, the relief against inheritance tax can be either 50 per cent or 100 per cent depending on the circumstances and the type of business assets involved.

Although there are generous reliefs for income tax and capital gains tax for furnished holiday lettings it has, in the past, been very difficult to obtain 100 per cent exemption for properties let out as furnished holiday accommodation. Typically, it has only been granted where the business comprises a number of properties. Where there was only one, it was extremely difficult to obtain any relief. Under these circumstances the Revenue would usually argue that the property was held as an investment and would not qualify for any relief.

However, a recent tax case heard here in Leeds may be about to change this. The decision of the First Tier Tribunal in Pawson –v- CRC (2011) TC 1748 has decided in favour of the taxpayer that relief was due in respect of a single property.

Whether or not relief is due depends on the individual circumstances of each case and the level of services provided by the owner. Generally, the lettings should be of a shortterm nature only, either weekly or fortnightly, and the owner should be substantially involved with the holiday makers in terms of their activities on and from the premises. In determining whether any relief is due the Revenue will look closely at the level and type of services provided to the occupants.

So what can you do to maximise your chances of obtaining 100 per cent as a business on your furnished holiday lettings? Let’s consider a typical holiday let. First of all the guests would be met by the owner or agent and the keys handed over. The guests would be shown round the property and the services on offer explained. The beds would have been made with clean linen and towels. There might be a welcome pack of essential items such as tea, milk and bread. The property will have been cleaned on arrival and may be cleaned mid-week. Basic services such as gas, electricity and water will be included within the weekly charge.

A TV/DVD player might be provided with access to a library of DVDS. The garden will have been maintained and rubbish disposed of by the owner at the end of the week. The owner might offer other services such as arranging delivery of groceries and newspapers. Temporary membership of local sports and swimming facilities may also be offered. The list is endless and the more services that are provided the better chance there is in succeeding with any claim to relief. What the Revenue are looking at is whether the owner is offering a “holiday experience” or simply a property to occupy for a week or a fortnight.

In the Pawson tribunal case the Judge concluded that an intelligent businessman would not regard the ownership of a holiday letting property as an investment and would regard it as involving far too active an operation for it to come under that heading.

Although the decision was only the first stage and is likely to be appealed by the Revenue it is nevertheless encouraging to owners of holiday lets as it sets the test as to what an intelligent businessman would make of the facts and there is also an important reference to the distinction between an active and a passive operation.

Although it is likely that the Revenue will continue to contest claims where only one property is involved, it is encouraging to see that there are positive steps an owner can take to maximise the chances of obtaining 100 per cent relief and that the courts are deciding in favour of the taxpayer.