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Furnished Holiday Lets - Achieving Inheritance Tax Relief

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Julie Butler - Expert Author

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Originally Published October 2006

It is known in the tax world that FHLs may qualify for Business Property Relief (BPR) for IHT provided the owner plays an active part in the management of the tenancies.

Many clients can use this as an active tax planning tool to ensure that existing property does qualify and to swap non qualifying assets e.g. let property, for the FHL.
 

Helping the Parents

One of the most practical uses of the potential IHT relief can be for clients’ parents! Many of the ageing population (known affectionately in the marketing world as the ‘silvers’) have purchased a retirement holiday home that they use and let out.

The property must meet certain requirements to qualify as a FHL and be eligible for the tax relief's thereon.

The property does not have to be in a tourist area but the pattern of lettings must satisfy these three conditions, Pt 3, Ch 6, ITTOIA 2005:

1. The property must be available for commercial letting as holiday accommodation for at least 140 days a year.

2. It must be actually let as holiday accommodation for at least 70 days a year.

3. It must not normally be let for a continuous period of more than 31 days to the same tenant in seven months of the year, and those seven months include any months in which it is actually let as holiday accommodation.

The guidance is found in Share Valuation Manual SVM 27600. The manual states:

‘In some instances the distinction between a business of furnished holiday lettings and, say, a business running a hotel or a motel may be so minimal that the Courts would not regard such a business as one of ‘wholly or mainly holding investments’ for the purposes of s.105(3).’

You may therefore normally allow relief where:

• the lettings are short term (for example, weekly or fortnightly); and

• the owner – either himself or through an agent such as a relative or housekeeper – was substantially involved with the holidaymaker(s) in terms of their activities on and from the premises even if the lettings were for part of the year only.

If you encounter any difficulties in this area you should refer to the Appeals Team.’

Further guidance is given in the IHT Manual 25278, e.g.

‘You should continue to refer to Litigation Group (IHTM01083) cases where relief is claimed and:

• the lettings are longer term (including Assured Shorthold Tenancies); or

• where the owner had little or no involvement with the holidaymaker(s) – for example a villa or apartment abroad; or

• where the lettings were to friends and relatives only; or

• where it is clear that no services were provided to the holidaymakers.’

The tax planning confusion rests with the extent of the involvement with the tourist. The tax relief is helped if there are lots of services provided e.g. ‘the meet and greet’, organising car hire, cleaning and laundry, supply of basic food for the fridge, etc. The owner can subcontract out these services. The important point is the extent of the involvement with the holidaymakers even if this is handled by an agent. The key is to ensure there is a contemporaneous record of the services provided. Further examples are visits to the cottage with local maps/guides, historic attractions, organising the maintenance of the property prior, during and after the period of let, including gardening.

Practical tax matters are that whereas non ‘holiday let’ periods can qualify for the Income Tax, National Insurance (NI) and Capital Gains Tax (CGT) advantages, in order not to fall foul of s 105(3) IHTA 1984 the greater evidence of the provision of practical services to genuine holidaymakers will help. For example:

1. The location of the cottage is in a tourist area.

2. The property is marketed professionally.

3. Small business rates are paid.

4. The cottage is awarded a rating by the English Tourist Board.

5. Public liability insurances are paid on the property.

6. The operation of the business is commercial and profits are made and tax paid accordingly.
 

Sharpening the knife

When claiming BPR on FHLs, one is more than likely going to meet great opposition by HMRC and you need to be prepared to fight. Fortunately, there is plenty of internal guidance in the IHT manuals which actually support the claim and these can be used in support of the claim. One of the more interesting texts can be found at IHTM 25277, e.g.
IHTM25277 - Caravan sites and furnished lettings: Hotels, Bed and Breakfast and Residential Homes
IHTA84/S105 (3) will not usually apply to these businesses in view of the level of services provided. This has been recognised by the courts who have distinguished these businesses from mere exploitation of land. In Griffiths (Inspector of Taxes) -v- Jackson 56 TC 583 at page 593, Vinelott J observed:

“The distinction between a hotelier or a lodging house keeper, on the one hand, and the owner of a property who lets furnished rooms and provides services is no doubt in practice a narrow one, more particularly in these days of self-service hotels and motels, but the principle is clear and in the present case there can be no doubt on which side of the line the taxpayer’s activities fall.”

Only in cases where it is clear that IHTA84/S105 (3) applies should you pursue it. Any doubtful cases must be referred to the Litigation Group (IHTM01083) before an entrenched position is taken.
 

So what are the Income Tax and CGT advantages?

Commercial furnished holiday letting is treated as a trade for many tax reliefs, although it is not actually a trade.

Losses from the FHL can be set against other income of the same year, unlike normal property income losses, which must be carried forward to set against property income in future years.

The capital gain made on the disposal of a FHL property:

• attracts Business Asset Taper Relief (BATR) as opposed to non-business taper relief;

• can be rolled over into the purchase of another FHL property or into a different business asset, which defers the gain until the replacement asset is sold; and

• can be held over as a gift of business assets, so CGT is deferred until the recipient disposes of the property.

In addition, the FHL may qualify for BPR as long as the owner plays an active part in the management of the tenancies.

So what are the disadvantages? The issue of Class II NI Contributions (NIC) on property income is a strange one as guidance cannot be found in the HMRC manuals and indeed the Property Income Manual clearly states that as furnished holiday letting is not a trade, class IV NIC is not due (PIN 4120).

However Class II NICs are frequently demanded where various types of lettings are undertaken, although in the case Rashid v Garcia SpC 348, HMRC argued the opposite when Mr Rashid tried to claim benefits based on the Class II NICs he had paid. It was held that Mr Rashid was not in business although he let and managed four properties.

VAT at 17.5 per cent will apply to the rents from a FHL if the property is advertised as such and the owner is, or should be, VAT registered. So if the total of rental income received from the FHL properties plus any other VATable supplies already made by the landlord exceeds £61,000 in 12 months (VAT registration limit from 1 April 2006) the landlord must register for VAT. If the landlord is already VAT registered for another business they must charge VAT on the rents from the FHLs.

Obviously the charge of VAT to what are assumed non-VAT registered holidaymakers could have a distinct disadvantage to profitability but some of the input VAT on the associated costs could be claimed, but this is not an opt to tax so beware on the question of over claiming input VAT.
 

Conclusion

The burden of IHT for the current band of pensioners, who have often accumulated their wealth through thrift and hard work, has been well documented by the popular press. They have even campaigned for action – well simple tax planning action is very close to hand. For those planning to move furnished property to a FHL the two year rule for IHT must be remembered.


About the Author

Butler & Co specialise in the farming and equine industries, focusing on preparation of accurate, detailed accounts combined with expert tax advice and planning, particularly in the fields of Inheritance Tax and Capital Gains Tax.

Julie Butler FCA can be contacted by Tel: 01962 735544 or  Email; j.butler@butler-co.co.uk.

Butler & Co.
Bowland House,
West Street,
Alresford, Hampshire,
SO24 9AT.



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Article Published/Sorted/Amended on Scopulus 2006-10-18 20:35:15 in Tax Articles

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