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  • Katherine Bullock

The door slams on Business Property Relief for holiday letting businesses. And it's green.



The past five years have seen the hurdle which holiday letting businesses need to leap in order to qualify for Business Property Relief (BPR) raised to higher and higher heights. With the recent First Tier Tribunal case of Marjorie Ross (deceased), it seems that it is impossible in reality for any holiday letting business to reach the level now set. Whilst many commentators consider that the decision may be questionable, it does provide some interesting practical insights for the practitioner, some tactical inspiration as to how a client in a similar situation should proceed and some explanation for HMRC's increasing confidence in this area.


There is also a glimmer of hope on the horizon in the form of another First Tier Tribunal case (The Estate of Maureen W Vigne (deceased) v HMRC) whose decision was released in the same week. This time the business was a livery business and it did succeed in qualifying for BPR.


"There is also a glimmer of hope on the horizon in the form of another First Tier Tribunal case (The Estate of Maureen W Vigne (deceased) v HMRC) whose decision was released in the same week"

The facts Mrs Ross died in November 2011. Her estate included a two-third share in the Green Door Partnership, which owned and let eight holiday cottages and two staff flats in Port Gaverne, Cornwall, and the UpsideDown house in Weymouth, which was also let for holidays. One flat was occupied by the caretaker for the cottages, who was employed full time seven days a week, and the other was let to a nearby hotel for use by its staff.


It is important to appreciate the significant extent of the connection with the hotel, which had previously been owned by Mrs Ross and her husband. Originally Mrs Ross had acquired the cottages as the perfect fit to the hotel business. When running the hotel had become too much for her, Mrs Ross had sold the hotel but had entered into an arrangement with its new owner that the seamless holiday experience that visitors to the cottages had enjoyed in the past through the use of the hotel's facilities would continue. In return for this, the hotel received 14% of the Green Door Partnership's turnover. After the sale, the holiday letting business continued to be run in conjunction with the hotel, the cottages on occasion being let as fully serviced hotel bedrooms as well as self-catering cottages.


The range of services provided to guests and advertised as available on the Green Door Partnership's website were extensive. It seems to have been common ground between the parties that they were more extensive than those provided in the previous authorities considered. Payment, booking, checking in and out, left luggage and lost property were all arranged by or dealt with at the hotel through the hotel's receptionist. Guests could have breakfast and dinner at the hotel with a discount applying or have food brought over from the hotel. The cottages were dog-friendly. They had outstanding cleaning staff. There was access to the hotel's internet and parking at the hotel's car park. Easter eggs were provided at Easter and Christmas trees at Christmas. The caretaker/handyman lived on site and was available to guests seven days a week. Mrs Ross' daughter would personally meet guests on a Friday and worked on the business for five to six hours per day during the rest of the week. Babysitters, car repairs, bike hire, fishing trips and taxis were arranged. There was a laundry, dog bowls, fishing nets, barbeques, log burning stoves and logs. All of the above was agreed to be the case by both parties.


It was argued on Mrs Ross' behalf that all of these services added up to a holiday experience, which whilst not a hotel could be described as similar to a hotel with the option to self-cater. As the Green Door partnership provided a holiday experience, not just the right to stay in a cottage for a particular period of time, this moved the character of its business from one whose character was mainly making or holding investments to one whose business was not wholly or mainly making or holding investments.


An analysis of the partnership's finances showed that the underlying capital value of the buildings far outweighed the value of the business itself and in fact two cottages had been sold, one to pay for Mrs Ross' care costs and another to make a payment of part of the inheritance tax due on Mrs Ross' death. The business was a family-ran, lifestyle business producing a modest profit, when refurbishment of the cottages was not required. An analysis of expenditure, on lines agreed with HMRC, showed that around 65% of the direct costs related to the non-investment business.


In short, Mrs Ross's advisers considered that this added up to a business that was not mainly one of making or holding investments and therefore met the requirements to qualify as relevant business property for BPR purposes. HMRC disagreed.


The arguments HMRC's argument is insightful in terms of HMRC's approach to holiday letting businesses and worth considering if faced with a decision as to whether to appeal a similar situation. Firstly, HMRC argued that the hurdle to turn the holding of land into a mainly non-investment activity was high. They referred to a statement in Martin that it was not the intention of Parliament that business property relief should be available to a landlord letting land. In fact, they suggested that even the provision of non-investment linked services were unlikely to be sufficiently material to prevent a letting business from being treated as that of mainly holding property for investment. In HMRC's view, Pawson had laid to rest any doubts about the availability of business property relief for holiday letting businesses.


The decision The Tribunal held that the business here was one of wholly or mainly holding investments. In coming to this decision, it followed the authority in George and considered the business in the round. However, reading the judgement, it appears that the approach was firstly to start from the position that the business was an investment business and then to consider whether there was sufficient evidence to disturb this presumption. This clearly places a very significant burden on the taxpayer and it is interesting that in the case of Vigne a different and perhaps more balanced approach was taken to viewing a business in the round. In that case, it was considered that the first step was to determine the facts and having done that to then consider whether the business so described was an investment or a non-investment business.


The First Tier Tribunal in Mrs Ross' case decided that even if a property is actively managed that does not necessarily mean that it is not mainly an investment business. The test is a qualitative and not a quantitive test. Having an especially good handyman or more regular cleaners does not elevate a business from being an investment business to a non-investment business. However, there was a spectrum and the Green Door Partnership was significantly higher on that spectrum than the facts considered in earlier authorities. For the purposes of this spectrum, a hotel was at the top end and so could qualify as a non-investment business. In reading the decision, it is difficult to avoid the impression, however, that anything short of a hotel, could not meet the criteria. Running a self-catering business was by its nature different to running a hotel business. Mrs Ross had sold the hotel because it was too time consuming to run and this in itself demonstrated, in the Tribunal's view, that operating the cottages was fundamentally different to running a hotel.


The extent of services provided could not change the quality of the business which was being carried on from something which was the mere renting of land to something closer to a mainly non-investment business. The mere proximity of the hotel and the fact that from a guest's perspective nothing changed before or after the hotel was separated from the Green Door partnership's business could not disguise the character of what was actually being provided by the partnership in the relevant periods. Guests of the self-catering cottages got exclusive possession of a whole property and the ability, if they wanted to be "left to their own devices" in a private dwelling which was theirs for the holiday period. No amount of cross-over services or shared facilities could alter this fundamental difference, whatever the quantity or quality of the additional services provided. What guests really wanted was access to a property to call their own in a beautiful part of Cornwall to enjoy for a specific period. The essence of that was the right to rent land in the form of one of the cottages for a specific period. That was an activity which consisted mainly of an investment in property.


It is interesting to contrast this with the decision in the Vigne case, where it was held that the livery business offered significantly more services than the right to occupy a particular parcel of land. However, perhaps a critical difference from the position in Ross was that the customers of the livery business expected the business to take some responsibility for the horses kept there. The horses could not be left to their own devices.


Summary of previous caselaw The tribunal did provide a useful summary of previous case law derived from the past authorities, which was not disputed by the parties. This is reproduced below and should provide a helpful starting point for the practitioner: (1) The owning and holding of land to earn rental income is generally to be treated as an investment activity. (2) The holding of land can include non-investment activities. (3) The test under s 105 IHTA 1984 requires consideration of whether those non-investment activities are more significant than the investment activities. (4) The question of whether a business is mainly an investment business is a question of fact and degree. (5) The question of whether something is an investment activity is not limited to passive investment activities such as long leases managed by managing agents. (6) The holding of land may be incidental to the running of a business (as in a hotel or holiday camp) or may be the essence of the business. (7) Accounting evidence and the profits or expenses allocated to the investment and non-investment activities of the business is one factor but is not the decisive factor. (8) Additional services provided to a rental property are "unlikely to be material" and in a normal property rental business additional services will either be incidental or will not be sufficient to prevent the business being one of mainly holding investments. (9) The characterisation of any additional services provided depends on the nature and purpose of the activity and not on the terms of any lease. (10) To come to a conclusion the business must be looked at in the round. (11) The test to be applied is that of an intelligent business person concerned with the use to which an asset is put and the way it is turned to account.


Breadcrumbs for the practitioner There were some nuggets of good news for the practitioner advising a taxpayer in a similar situation.


The tribunal held that there was no difference between whether the services were offered by the business owner themselves or via an agent, such as the hotel or, in the case of the UpsideDown House, an external commercial agency. This is helpful in deciding how personally involved in the business an individual need be to make a successful claim for BPR. It was also decided that the potential capital value of the land was irrelevant in coming to a conclusion about whether the business was mainly an investment business, particularly where there was no plan to sell the land and even where unforeseen circumstances had prompted a sale at significant profit. The mere fact that a gain has been made from land did not inevitably mean that the land was held as an investment. It was an inherent feature of the UK property market in recent years that property increases in value.


What can we learn from Mrs Ross' Executors experience? There are some practical considerations to take away from the case of the Green Door partnership.


It does appear that to be successfully classified as a non-investment business a holiday letting business will need very significant services indeed to succeed; possibly even expenditure in excess of 65% of its direct costs and even then, this may not be enough.


Perhaps it is time for the focus on the level of service, although important, to move away from the perspective of the provider (ie the time and cost put into providing those services) to the perspective of the holiday purchaser. In that case, is it now important to ask what is it that the holidaymaker values? What does he hold the business responsible for providing? Is it the location and exclusivity of the accommodation or is it the activities available? If this is the case, a claim might be more successful where the activities are paramount, for example at a holiday camp in a less attractive location or on a shoot.


It is clear that this decision will reinforce HMRC's confidence in their view and could have implications for businesses beyond holiday letting but where accommodation is provided to people left to their own devices – for example centres or bases provided for certain groups such as hostels for asylum seekers. The practitioner should certainly be prepared for a robust challenge from HMRC where a business is underpinned by the use or letting of land and it is no longer prudent to pin all hopes on the availability of BPR. It would be sensible to consider alternative estate planning strategies.


Conclusion In summary, whilst the Vigne case may offer a glimmer of hope that there is not a presumption that a holiday letting business is automatically viewed as an investment business with the onus on the taxpayer to prove otherwise, the case of Marjorie Ross does demonstrate that the hurdle for establishing a holiday business as a non-investment business for the purposes of BPR is extremely high.


Whilst, of course, the facts of each case are specific, and care is needed in seeking to apply a decision on one set of facts to another fact pattern, from a practical perspective, there are three key points for the practitioner to note from Mrs Ross' case: • Do not rely on the availability of BPR in these situations: consider alternative estate planning and think hard about the prospects of success before commencing litigation. • Consider and evidence wherever possible the importance of activities and services over location and exclusivity as well as the quality and quantity of the services. • Don't be distracted by the capital value of the land itself: an inevitable increase due to market forces in the value of an asset class that is used in the business does not inevitably create an investment business.


It has been argued that the Tribunal in Vigne found differently to the Tribunal in Ross because horses cannot be left to their own devices. If that is true, perhaps it will provide a glimmer of hope for certain types of holiday letting businesses, but for others at the moment the door to BPR seems firmly shut.


Citations Ross' Executors v HMRC [2017] UKFTT 0507 (TC) Vigne's Executors v HMRC [2017] UKFTT 632 (TC) Martin v IRC [1995] STC (SCD) 5 HMRC v Pawson's Executors [2013] UKUT 050 (TCC) George & Another v CIR [2004] STC 147

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