Letting out a holiday home is a popular way of making money from a second property. Whilst it may offer financial advantages in the ‘here and now’, when you are planning for the future, it is worth knowing how your property will be treated for inheritance tax purposes.
You may be aware that businesses (and certain business-related assets) can sometimes have their value discounted for inheritance tax. This is through a tax-saving measure called Business Relief. We looked at Business Relief in a previous blog post, and explained how it can potentially save huge amounts of inheritance tax.
But determining if you can claim Business Relief for a holiday letting is actually more complicated than you might imagine.
Before considering this further, let’s look again at how Business Relief works and how helpful it can be.
There are two levels of Business Relief – 50% relief and 100% relief. If either of these reliefs apply, it will have the effect of reducing that asset’s value for the purposes for inheritance tax. For example, an asset valued at £200,000 will only have £100,000 of its value taken into account if 50% relief applies and will have none of its value included if 100% relief applies.
For more information on how inheritance tax is calculated, have a look at our factsheets.
- 100% relief can apply to:
- A business, or an interest in a business, you own;
- Any shares you own in a company which is not listed on any stock exchange.
- 50% relief can apply to:
- Any shares you own in a company which is listed on a stock exchange, where those shares give you control of the voting rights in the company;
- Any land, building, or machinery you own which was used in a business you controlled (or in which you were a partner);
- Any land, building, or machinery used in the business which was held in a trust you were entitled to benefit from.
However, not every kind of business property will be eligible. To qualify, the property must meet the following requirements:
- You must have owned the business, interest, or asset in question for at least 2 years prior to your death (or, for lifetime transfers, prior to the date when it was transferred);
- If it is an asset (rather than a business or shares etc.) it must have been used wholly or mainly for business purposes;
- If it is an asset, it must be needed for future use in the business.
Even if your business assets meet all the above criteria, there is a final set of conditions which can disqualify the asset from Business Relief – one of these is particularly relevant to holiday lettings.
You cannot claim Business Relief if the business:
- Deals wholly or mainly with:
- stocks or shares
- land or buildings
- making or holding investments;
- Is a not-for-profit organisation;
- Is being sold. Although, if your estate will be paid mainly with shares in the purchasing company, Business Relief might still apply;
- Is being wound up. However, Business Relief may still be claimed if this is just part of a process to allow the business to continue.
Where holiday lettings are concerned, the troublesome provision is the condition that a business cannot deal ‘wholly or mainly with making or holding investments’ in order to qualify for Business Property Relief.
So, can holiday lettings qualify for Business Relief?
This is a question which has come before the courts on many occasions. Unfortunately, the vast majority of judgments have ruled that a holiday letting is a business which is mainly concerned with holding an investment, and as such does not qualify for Business Relief.
The general theme of these cases is that, even if the holiday lets are actively managed – for example with finding guests, marketing, maintenance, and cleaning etc. – they are still mainly concerned with an investment. Many active management activities are held to be for the purpose of improving the return on the investment – either by increasing the underlying value of the property, or by helping it to generate income.
However, a recently decided case has bucked this trend. So, does this mean holiday lettings will now benefit from Business Property Relief? Let’s look at the case to find out.
The Personal Representatives of Grace Joyce Graham (deceased) v HMRC  UKFTT 0306 (TC)
The case concerned the estate of Grace Graham, who died in 2012. Grace had been living on St Mary’s in the Scilly Isles, in an old farmhouse which she had renovated with her late husband. They had converted part of the farmhouse into four self-contained flats. At the time of her death, Grace was letting these flats out as holiday lets, working alongside her daughter, Louise Graham.
Upon Grace’s death, Louise was appointed as a personal representative to deal with her mother’s estate. In the estate returns, Louise claimed Business Relief on Grace’s interest in the holiday lets. HMRC argued however, that Business Relief did not apply as the holiday let business was mainly concerned with holding an investment.
The judge framed his decision by considering a scale. At one end, were basic ‘hands-off’ investments – holiday lettings which generated income with little to no input from the owners. At the other end, were businesses like hotels, which involved an extensive service element.
The judge considered that the extra services, such as those which a hotel or resort might offer, provided the key to deciding where a holiday letting business would fall on this scale. He stated that each element of the business’s activities should be considered separately and then the whole picture examined to see if the business could be accurately described as one which was ‘mainly concerned with holding an investment’.
In the case of Grace and Louise, the judge considered that the extra services provided were exceptional. Some of these extra services included:
- A swimming pool
- A sauna
- Bikes which guests could hire
- A games room
- A laundry
- A guest lounge
- A large ornate garden
All of these were regularly cleaned, maintained and kept in the best possible condition for guests. The judge also noted that Louise’s welcoming of guests and hosting went above and beyond most holiday lettings. He stated the business was ‘more like a family run hotel than a second home let out in the holidays’.
Taken as a whole, the judge held that the business could not be said to be mainly for the purposes of holding an investment.
Will I be able to claim Business Property Relief on my holiday let?
Unfortunately, even with the new judgment, this remains a difficult question to answer. What is clear from this and previous cases, is that each matter will be decided upon its own facts.
Even so, judgments can be useful to see which facts a court is likely to examine when presented with this question.
This recent case supports the idea that a holiday letting can be eligible for Business Relief, giving some hope to holiday let owners who do run their lettings more akin to a hotel business. That said, anyone hoping to claim Business Relief on a holiday letting still has significant obstacles to climb. The case has not overturned the large body of previous cases which still consider most actively managed holiday lets to be investment businesses. Instead, it has identified a holiday letting business which is higher up the scale than most.
For many holiday lets, meeting similar standards is likely to prove difficult. It is clear from the judgment that the level of care and service provided to guests by Grace and Louise Graham was exceptional. And so, with such an apparently high bar being set, the case itself may prove to be exceptional as well.
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