UK Furnished Holiday Lets Can Achieve Inheritance Tax Relief
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Originally published 20 December 2006
Furnished Holiday Lets will qualify for Business Property Relief (BPR) for
IHT provided the owner plays an active part in the management of the “business”
operation. IHT relief can be achieved on a single property.
Many clients can use this as an active tax planning tool to ensure that
existing property does qualify and to swap non qualifying assets with the FHLs
or to “carry out a conversion” e.g. move from let property status, to furnished
holiday let status.
What conditions must be met?
The property must meet certain conditions to qualify as a FHL and to be
eligible for the full tax reliefs including IHT.
The property does not have to be in a tourist area (but see below), however
the pattern of lettings must satisfy these three conditions, Pt 3, Ch 6, ITTOIA
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
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.
Share valuation guidance
Guidance as to the availability of IHT relief, 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
It must be remembered that this is the manual directing Inspectors and is for
guidance only. The key point here is that an “agent” can be used to deal with
services that need to be provided to holiday makers.
Where are the risks of IHT being disallowed?
The HMRC will attempt to disallow IHT relief for non-compliance. 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.’
One of the important points here is the letting to friends and relatives
ONLY. There must be external lettings and evidence of this as indeed there must
be evidence of the services provided.
The importance of “services provided”
The IHT planning confusion rests with the extent of the involvement by the
owner or their agent with the tourist. The IHT relief is helped if there are a
multitude 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
(please excuse the pun) 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. In order to
assist with the contemporaneous records it would be useful to have photographs
of “the meet and greet” and the supply of brochures etc.
Practical services to genuine holidaymakers
Practical IHT planning - there has to be greater evidence of the provision of
practical services to genuine holidaymakers, 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
there is the need for greater evidence of genuine marks of FHLs. 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
HMRC opposition to the claim for IHT relief
When claiming BPR on FHLs, the tax adviser is more than likely going to meet
opposition by HMRC and the tax adviser needs 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
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.
Other tax advantages
It is inappropriate to look at the IHT on FHLs in isolation. In order to
achieve the IHT reliefs all the compliance issues surrounding the income tax,
VAT and NIC must have been dealt with correctly.
So what are the Income Tax, CGT advantages and compliance angles?
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) which can provide a maximum CGT
charge of 10%, 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
• can be held over as a gift of business assets, so CGT is deferred until the
recipient disposes of the property.
Commercial advantages over normal rental properties include higher levels of
liquidity given the fact that there is no sitting tenant with a raft of legal
protection keeping him in the property.
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.
The two year rule
A FHL must have been owned and been compliant with the FHL rules for two
years in order to qualify for IHT relief. CTO are taking a close look at the
activity in the business two years before death. If the owner has been compliant
with the FHL legislation for eight years prior to the last ten and the two
non-compliant years were the last two, then IHT relief could be lost.
In the last few years before death it may be that the owner of the FHL
relaxes in say the advertising of the property and ensuring FHL is compliant in
number of days left. The FHL must meet the criteria for the two years before
death. The family and/or potential beneficiaries should ensure that an FHL stays
The probate valuation of the FHL
The valuation of the FHL has to be ascertained in accordance with the correct
statutory principle as set out in s160 IHTA 1984.
“The value for IHT purposes is the price which the property might reasonably
be expected to fetch if sold in the open market”. FHLs are historically
difficult to value as markets vary greatly.
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 – simple tax planning
action is very close to hand.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West
Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd
edition) and Equine Tax Planning ISBN: 0406966540. To order a copy call Tottel
Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2007-07-21 01:26:08 in Tax Articles