This article examines the challenges HMRC have raised for land and property based businesses via the courts in recent years and the ‘trading’ requirements that must be met.
Furnished holiday letting companies, serviced offices and the provision of short term accommodation in the form of hotels are examples of businesses which have been previously accepted as qualifying as a trade by HMRC in relation to the application of Business Property Relief (‘BPR’).
- BPR provides relief from Inheritance tax at 50% or 100%
- There is no BPR if the business is regarded as non-trading and carrying out investment activities only.
This article focuses on the developments in case law relating to serviced accommodation and holiday lettings, however, there have been similar principles established for BPR claims for farming and estates businesses.
‘Investment’ or ‘Trading?’
The tests originating from case law around 20 years ago established that the activities of a business must be examined in a quantitative fashion to determine whether its overall activities related to trading, as opposed to investment. The trading element of the business should constitute 50% or more of the business activity to qualify for BPR and the investment elements of the business should remain at the lower level.
This was determined by looking at the level of income and profit the business achieved from its activities, time spent by each member of staff, where the original capital had been invested and ongoing continuing investment, and the overall nature of the business in looking at whether it could be seen as primarily ‘making or holding investments’ or a conscious effort to pursue a trade for the purposes of realising a profit.
Where is the Trade?
In recent years HMRC have challenged property trading businesses on the basis that the level of services provided was low. Without a significant level of services provided alongside the provision of rental accommodation, HMRC can argue that the business is primarily an investment activity in nature which would not qualify for BPR.
As the trade lies within the services provided, it is important to demonstrate on paper and in practice that the business provides these services to the required scale. A furnished holiday letting business could for example demonstrate that its clients are offered an ‘all round service’ such as; laundry and cleaning services, reception services, food and drinks or a café on site, television and phone services, excursions and entertainment (i.e. evening activities in the café or bar area). Simply providing referral services for these services is not sufficient.
The approach by HMRC has been to consider businesses ‘in the round’ and to adopt a more qualitative test looking at the nature of the business. This places the taxpayer at a far greater burden to demonstrate that the trading side of the business significantly outweighs the investment side (which relates to the simple provision of accommodation in its simple form).
Some Practical Points . . .
It is important to remember that different standards of ‘trading’ exist in established case law for lifetime taxes (Capital Gains Tax for example) and for death taxes, relevant to BPR. One should never presume that HMRC will seek to agree a position for BPR on the basis that they have accepted previous claims for trading in a taxpayer’s lifetime.
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This article was published in June 2018 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.