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HMRC internal manual

Shares and Assets Valuation Manual

IHT Business Property Relief: Hotels, Bed and Breakfast, Residential Homes and other accommodation, holiday lettings, the general admission of people to land and caravan sites

Hotels, Bed & Breakfast, Residential Homes and other accommodation

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 and Technical Advice Team (LTAT) before an entrenched position is taken.

There are increasing numbers of businesses providing accommodation services for various groups, such as asylum seekers or vulnerable adults. The range of services provided in these businesses can vary enormously, and you will need to examine them in detail to establish where they sit on the non-investment/investment spectrum.

The self-service/ budget hotel industry has expanded considerably since Vinelott J’s 1982 observation, and you should also ascertain the nature of a ‘hotel’ business to establish whether on the facts it actually falls at the investment end of the spectrum.

Holiday lettings

HMRC’s view is that furnished holiday lets will in general not qualify for business property relief. The income derived from such businesses will largely consist of rent in return for the occupation of property. There may however be cases where the level of additional services provided is so high that the activity can be considered as non-investment, and each case needs to be treated on its own facts.

Our view was confirmed at the Upper Tribunal in the case of Commissioners for HMRC v Lockyer and another, Personal Representatives of Pawson (deceased)  [2013] UKUT 50 (TCC), which concerned a single bungalow on the Suffolk coast.

The Tribunal found that the various activities carried on, including

  • the taking of active steps to find occupants,
  • making the necessary arrangements with them,
  • collecting payment of the rent,
  • spending on repairs, redecoration and improvement of the property,
  • maintenance of the garden and grounds to keep them in a tidy condition,
  • keeping the property insured

were activities that fell on the investment side of the line.

Services provided, such as cleaning, the provision of heating and hot water, provision of a welcome pack, and being on call to deal with queries and emergencies, were not of such a nature and extent that they prevented the business from being mainly one of holding an investment.

In his decision,  Henderson J provided a clear summary of the relevant case law, including Martin/Moore (IHTM25271), George (IHTM25275) and McCall (IHTM25276) and, drawing on Carnwath LJ’s judgement in George, stated

“In any normal property letting businesses, the provision of additional services or facilities of a non-investment nature will either be incidental to the business of holding the property as an investment, or at least will not predominate to such an extent that the business ceases to be mainly one of holding the property as an investment.”

Henderson J concluded:

“Looking at the business in the round, there was in my view nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and certainly no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature.”

In another case of Anne Christine Curtis Green v Commissioners for HMRC [2015] UKFTT 334 (TC) the Tribunal supported this approach. The judge also said that scale was not a factor (the property consisted of five self-catering units, as opposed to the single unit in the Pawson case). Furthermore, she found that the difference between the amount of rent that was received from the holiday lets and what might have been received if the property was let on an assured shorthold tenancy was largely attributable to market forces, not to services provided.

The general admission of people to land

In the types of cases which follow it will be necessary to consider whether the income received amounted to nothing more than payments for the use of the site or whether it related to a material extent to the payment for facilities and services provided on the site.

All cases in this category should be referred to LTAT.

Caravan sites

Caravan sites may present more problems in view of the variety of facilities provided. They may range from land on which caravans are parked and with minimal utilities laid on up to a full-scale holiday camp where the recreational and social facilities are of primary importance and the accommodation is only secondary.

Guidance on the treatment of caravan parks for Business Relief purposes has been given in a number of cases referred to the Special Commissioners.

In Hall and another (executors of Hall deceased) v IRC [1997] STC(SCD) 126, the park contained both static caravans occupied during the season and wooden chalets which were let on long leases. The business’s income from rents and standing charges greatly exceeded its income from commissions on the sale of caravans and other sources. It was held that Business Relief was not due.

Powell and another (personal representatives of Pearce deceased) v IRC [1997] STC(SCD) 181 involved a small caravan park with few facilities where the majority of the residents were long-term. The whole of the deceased’s income came from pitch fees due from the long-term residents and rents due for hired caravans. Again it was held that Business Relief was precluded by s.105(3).

In the Powell case, the question was raised as to whether the income tax treatment of the business determined whether it should qualify for IHT Business Relief or not. The Special Commissioner decided that it did not. He said:-

“I will first deal with the question of the assessments to Sch D income tax of the income of the business carried on by Mrs Pearce. In my judgement the income tax status of the income of the business is irrelevant in the context of inheritance tax. The district inspector may or may not have been correct in his assessment but his decision can have no relevance to the question which I have to decide. The availability of business property relief depends entirely on the interpretation of the provisions of the Inheritance Tax Act 1984 and I do not believe that the past income tax treatment of the income of the business necessarily throws any light on the inheritance tax position. A person holding a portfolio of stock exchange investments would have his income taxed under Sch D. Nevertheless it is common ground that he would be the holder of investments.”

Furness v IRC (1999) SpC 202

Although the caravan site in this case was licensed primarily for static vans, caravan rallies also took place in summer and a high level of service was provided for those using the site. More importantly, the static caravans were owned by the residents who had to buy them from the partnership, could not sublet them and had to sell them back to the partnership.

The net profit from the sales exceeded the net profit from the renting of pitches and evidence was given that the proprietor had spent 80% of his time on activities not connected with caravan sales. The business was not comparable to that of a landlord owning a block of flats. Business relief was available.

Weston (Executor of Weston deceased) v CIR (2000) STC 1064,

In this case the photographic evidence submitted to Lawrence Collins J reminded him of a suburban housing estate in miniature. The mobile homes did not have the appearance of caravans. They looked much more like small bungalows. It was found from standing back and looking at the matter in the round that the pitch fees were not ancillary to the caravan sales but that if anything the opposite applied. The business was one which consisted mainly of holding investments and business relief was not available.

IRC v George (2003) EWCA 1763

Although the Weston approach was approved by the High Court in George, that decision was overturned in the Court of Appeal, which found in the taxpayers’ favour.

The Court of Appeal rejected the legalistic approach adopted in the High Court on the strength of Weston in favour of the more general overview adopted in Farmer v IRC (1999) STC (SCD) 321. This involved looking at the business in the round and deciding whether the holding of property as investment was the main component of the business. If it was not, then the business was entitled to business relief.

The business in George __was a true hybrid, with income from caravan sales, commission on caravan sales, site fees, supply of electricity, gas, water and sewerage to residents, a club also open to non-residents, caravan storage, let property and fields, insurance, and interest on cash balances.

The judgement in George __is helpful in clarifying what is to be regarded as either investment or non-investment activity. It makes clear that the provision of services to owner occupiers under the terms of a pitch agreement is largely a non-investment activity. This means that in cases where a large part of the business’s activities (measured in both time and money) consists of providing services to residents, we would be more likely to consider that the business was neither wholly or mainly investment in nature. However, we need to be satisfied that the figures for pitch fees, for instance, are not artificially depressed in the accounts in favour of inflated figures for wages or other non-investment expenses.

Note also that payments paid by non-owner occupiers may well be primarily rental payments to occupy the caravan/mobile home/chalet, rather than for the provision of services.

The judgement in George also recognises that the time and money spent on maintaining amenity areas is in part designed to maintain the value of the owner’s investment. It follows that the taxpayers are entitled to return a reduced level of investment income by offsetting against it part of the maintenance costs. As this could lead to the net investment income being, proportionally, a smaller part of the overall income of the business we might well conclude in a particular case that the business was neither wholly or mainly one of holding investments.

On the other hand, we would also need to take into account the time spent by the owner and/or his employees in the maintenance work. When taken together with other work carried out in the business, the evidence might lead us to conclude that the majority of work done is involved in maintaining the value of the owner’s investment. If so, then we would seek to deny the claim under IHTA84/s105 (3).

The judgement in George __also suggests that the holding of land as an investment is separate and distinct from the service element of the business. Finally, when looking at the facts ‘in the round’, trading figures are only a part of the overall picture.

When dealing with a claim for business relief on a caravan park, you will need to obtain detailed business accounts, including breakdowns of both the income and expenditure between the investment and non-investment elements of the business. In addition, you should ask the taxpayers to state precisely what services were provided to the park residents and how long was spent by the deceased (as park owner) and his partners and/or employees providing those services.

Other lettings

You will need to consider whether the exploitation of land ownership in other ways, such as self-storage, car parks, business parks, DIY livery, moorings or beach huts, is an investment activity.

The Court of Appeal in Northern Ireland considered the letting of grassland under agistment arrangements in the case of McCall and another (personal representatives of McClean deceased) v Revenue and Customs Commissioners [2009] STC990.

The deceased owned land consisting of a number of fields of grass. Her son-in-law looked after the fields. He inspected the fencing, gates and water supply, removed rubbish, unblocked drains, did emergency repairs to damaged fencing and tended the drinking troughs. He also informed the grazier of any problems he observed with the animals. This work amounted to about 100 hours a year. The graziers themselves fertilised the land.

The Court of Appeal found that the Special Commissioner had been entitled to find that the activities of the deceased were maintenance work necessary to allow the land to be let for grazing. The work was aimed at maximising the return from grazing, which represented income from the land for the deceased.

The absence of a full and exclusive right of occupation of the land by the graziers did not prevent the business being regarded as an investment business. The deceased’s business consisted of earning a return from agricultural land, the real and effective value of which was its grazing potential, and not from the provision of services. Accordingly, the Special Commissioner had been fully entitled to conclude that the business was wholly or mainly one of holding investments and to deny relief.

  Additional Guidance: SVM150000