Bad news for owners of holiday lettings

A line of cases have considered what amounts to business property under s105(3) where a business is not a relevant business if it "consists wholly or mainly of one or more of the following, that is to say dealing in securities, stocks or shares, land or buildings or making or holding investments".

This implies three questions for owners of furnished holiday lets:

• Does the furnished holiday let amount to a business? (Usually, yes.)
• For investment activities and trading activities, are the owners running two separate businesses or a single composite business?
• Assuming a furnished holiday lets owner runs a single business, does it comprise wholly or mainly investments?

In two pertinent cases about caravan parks (IRC v George) and grazing agreements (McCall v RCC), the question of what amounted to wholly or mainly investments was described as "a spectrum at one end of which is the exploitation of land by granting a tenancy coupled with sufficient activity to make it a business, which may be activity in granting tenancies rather than activity in relation to the tenancy once granted. At the other end of the spectrum, while land is still being exploited, the element of services means that there is a trade, such as running a hotel or a shop from premises owned by the trader."

Furnished holiday lets usually involve providing services to some degree, but it is clear that actively managing property does not necessarily stop the business property comprising wholly or mainly of investments.

In the recent case concerning a claim for business property relief (BPR) by the executors of the late Mrs Pawson on a let holiday cottage in Suffolk, HMRC disputed the claim. Its main grounds were that as the business was mainly one of holding the property as an investment, it did not qualify for BPR. The services provided were rather minimal but nonetheless the First-tier Tribunal concluded that an intelligent business person would not regard owning holiday letting property as an investment because it was an active operation.

The Upper Tribunal disagreed, concluding that owning and holding land to obtain an income would generally be characterised as an investment activity.

Further, the investment can be actively managed, e.g. the property and grounds maintained and marketed, while still retaining its character as an investment, as these activities are directed at maintaining or enhancing the capital value and getting a regular income from lets.

The Upper Tribunal did agree that some basic services in the Pawson case, such as providing a cleaner/caretaker, heating and a telephone, went further than simply property management. However, the key point was that these additional services were not the main purpose of the business but were subsidiary to the letting business.

The "critical question" was "whether those services were of such a nature and extent that they prevented the business from being mainly one of holding [the holiday cottage] as an investment". The investment was actively managed but without losing its critical character as an investment. It is the nature of the activities, not the degree or level of activity that is the relevant test.

The main business was about holding an investment, so BPR could not apply. The taxpayer has been refused permission to appeal.

Therefore, to obtain BPR, owners of furnished holiday lettings businesses will have to show that the services provided exceed normal expectations to such an extent that they fundamentally change the nature and purpose of the business.

An owner may consider providing restaurant bookings, a visitor centre, laundry and shopping service, etc, but to avoid the "wholly or mainly… investments test", they must be services that prove the property was not an investment. This will be easier to prove where the business consists of a diverse range of activities/services.

William Hadley (pictured) is a solicitor and Fiona Graham is a partner in the private client and tax team at Boodle Hatfield

The firm writes a regular blog on landed estates for Private Client Adviser