An analysis of the case of Firth and the availability of Business Property Relief in relation to aparthotels and furnished holiday lets
The recent case of Firth has continued the debate as to whether aparthotels and furnished holiday lets qualify for business property relief.
The recent case of Firth (Mr Bruce Firth and Mrs Rita Firth as the trustees of The L Batley 1984 Settlement) last year culminated in a decision that has continued the debate as to whether furnished holiday lets (“FHLs”) qualify for business property relief (‘BPR’).
The question as to whether FHLs qualify for BPR has been considered in previous cases prior to Firth, where the courts have tended to rule against the taxpayer, and thereby refuse BPR on the FHLs. In the case of Firth, HMRC argued that an aparthotel business was equivalent to a FHL business, and ultimately the First-tier Tribunal held that a series of aparthotels did not qualify for BPR. This article will explain the court’s ruling in Firth, how the decision was made and the practical steps that could be taken to improve a claim for BPR in relation to a FHL.
What is BPR and when is it available?
BPR is an inheritance tax relief which applies to relevant business assets. If the appropriate conditions are met and BPR applies, it is a very valuable relief which applies to the value of a business owned by an individual or by trustees, or to shares in an unquoted company.
In the context of FHLs, the key requirement is that the business must be ‘wholly or mainly’ trading, which means more than 50% trading. For example, a business that consists of making or holding investments will not attract BPR, such as a residential or commercial property letting business.
It is difficult to successfully claim BPR for FHLs, the starting point generally seems to be that they are viewed as investment businesses, where rent is received in return for the occupation of a property. For FHLs to qualify for BPR, there must be an exceptionally high level of additional guest services. The taxpayer will also need to provide sufficient evidence, when looked at in the round, to prove that the business was overall a trading business.
What were the facts in Firth?
The appellants were trustees of a settlement that included shares in a company whose portfolio involved various aparthotels. The company itself defined their aparthotels as combining ‘the comfort and quality of a luxury hotel with the space and flexibility of a well-equipped apartment’. The various properties included a number of serviced apartments. One of the properties had a reception, communal kitchen and conference room but no parking; another property had café facilities and a reception area but no parking; the other properties had some private parking but no reception or communal areas.
The apartments themselves mainly catered for corporate customers and were available on a night-by-night basis. The guest services provided included the provision of a welcome pack, linen, towels, tea and coffee, the option to add flowers, food or extra packages, cleaning if requested and reception/concierge service.
On the settlement’s 10-year anniversary, the trustees submitted a claim to HMRC for 100% BPR in relation to its shareholding in the aparthotel company, the inheritance tax declared for this shareholding was stated to be zero by the trustees. HMRC refused the claim for BPR, arguing that the aparthotel business was not a qualifying business for the purposes of BPR, as the business was primarily involved in the provision of self-contained short-term rental accommodation, and was therefore one of mainly holding investments.
In their ruling, the Tribunal considered the case of IRC v George, which set out five factors to analyse where a business sits on the investment/non-investment spectrum:
- The time spent on each aspect of the business;
- The capital employed in the business;
- The income of the business;
- The profit made by the business; and
- The overall context of the business.
When looking at these factors for a property-based business, it is important to decide the real nature of the business – i.e. is it an investment in land with ancillary services or is it a service business with an ancillary investment in land.
The Tribunal examined the non-investment services provided by the aparthotel business and decided that these additional services amounted to very little in reality and were not enough to pass the 50% wholly or mainly trading test. The Tribunal dismissed the appeal, ruling that the aparthotels were not relevant business property on the following grounds:
- the properties were acquired as investment properties;
- the appellants were not able to provide substantive evidence that the extra facilities/services were regularly provided to guests; and
- the non-investment related activities were not sufficient to take the business over the line into the trading side of the spectrum.
Key points to maximise the chance of getting BPR on an FHL
Generally speaking, for a property-based business to successfully secure BPR, there needs to be a high level of facilities and time input which goes beyond ordinary investment activities. In the rare case of The Personal Representatives of Grace Graham v HMRC, the Tribunal ruled in favour of the taxpayer and found that the additional services provided were significant enough to allow the FHL to qualify as relevant business property. The services provided in the Graham case included the hire of golf buggies and bikes, the provision of an outdoor pool, sauna, barbecue area, games room and laundry. It was noted that the provision of services required approximately 200 hours of work during a 35-week rental season. The Tribunal identified further non-investment activities including the provision of books, information leaflets and sports equipment.
Any activities such as the provision of electricity, gas, furniture, tea and coffee, ordinary maintenance and repair of the property/gardens will be seen by the Tribunal as ancillary activities and will fall on the investment side of the spectrum.
In Firth, the Tribunal noted that some aparthotels could be categorised as providing services with ancillary occupation of the accommodation, and they would therefore qualify as trading businesses. The following factors would support a claim for BPR on a FHL (or an aparthotel business):
1. Additional services should be provided to guests, and HMRC will look for the business to provide services more in line with those provided by a hotel. For example, regular cleaning, kitchen facilities, the provision of some meals, personal welcome on arrival, gym or swimming pool facilities, entertainment facilities, car/equipment hire etc.
2. These non-investment activities should ideally be provided to guests on a regular basis and over a longer period of time rather than just within the two-year relevant period of BPR.
3. All documentation that will help support any claim for BPR should be retained, as it is likely that HMRC will scrutinise any substantial claims for BPR on a FHL business. This includes historic financial statements, in the accounts, the turnover should distinguish between basic rent and the additional income from other services. Similarly, the expenses should be split between general upkeep/repair and those relating to additional services. It is also helpful to provide documentation showing how management time is spent between customer care and the provision of additional services, compared to collecting rents and maintaining the building.
While Graham provides useful guidance in assessing a claim for BPR in relation to FHLs, HMRC made it clear that it was an exceptional case. For property-based businesses, it is important that the level and nature of any additional services are carefully considered. Furthermore, if a claim for BPR is anticipated, it is essential that these services are well documented and that good records are kept.