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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review considers the current position on the availability of inheritance tax relief for furnished holiday lets.

Context

It is well known that the special income tax and Capital Gains Tax regime for furnished holiday accommodation (‘FHA’, originally as defined in TA 1988 ss 503 and 504 and now to be found in ITTOIA 2005 ss323-326) does not extend to Inheritance Tax (IHT).

For IHT purposes, it was traditionally possible to get Business Property Relief (BPR) for a business of furnished holiday lets comprising a number of properties, although more recently (see below) relief could be obtained, subject to conditions, on a single property only. However, the initial version of the Inheritance Tax Manual released earlier in 2005 said at IHTM 25278: ‘The text at this point has been withheld under the Code of Practice on Access to Government information’.

Happily, however, the original text has been restored as set out below:

Caravan Sites and furnished lettings: holiday lettings

‘The Inland Revenue Solicitor has advised the office that in some instances the distinction between a business of furnished holiday letting and, say, a business running a hotel or a motel may be so minimal that the Courts would not regard such a business as one of “wholly or mainly holding investments” for the purposes of IHTA84/S105 (3).

You should therefore normally allow relief where:

• the lettings are short term (for example, weekly or fortnightly); and

• the owner - either himself or through an agent such as a relative or housekeeper - was substantially involved with the holidaymaker(s) in terms of their activities on and from the premises

even if the lettings were for part of the year only.

You should continue to refer to Litigation Group (IHTM01083) cases where relief is claimed and:

• the lettings are longer term (including Assured Shorthold Tenancies); or

• where the owner had little or no involvement with the holidaymaker(s) - for example a villa or apartment abroad; or

• where the lettings were to friends and relatives only; or

• where it is clear that no services were provided to the holidaymakers.’

(see Inheritance Tax Manual at paragraph IHTM 25278)

Application

In practice, HMRC Capital Taxes will look for the existence of the provision of some services to the holidaymakers, if BPR is to be allowed. Does this tie in somehow with the requirement that the owner, whether personally or through an agent, should be ‘substantially involved’ with the holidaymakers – though this is said to be ‘in terms of their activities on and from the premises’?

March 2006

Matthew Hutton

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

THE FIFTH ESTATE PLANNING CONFERENCE: CURRENT ISSUES 2006

East
Tuesday 13 June
Cambridge Belfry Hotel

Midlands
Tuesday 20 June
Sketchley Grange
Burbage, Hinckley

South
Tuesday 27 June
Norton Manor Hotel,
Sutton Scotney,
nr Winchester

West
Thursday 14 September
Bailbrook House, Bath

North
Tuesday 3 October
Weetwood Hall, Leeds

London
Tuesday 31 October
The Law Society’s Hall

For further details, brochures and booking forms please contact Matthew Hutton: email – mhutton@paston.co.uk or telephone – 01508 528388 (Ref: TaxationWeb).