MoneyWeek quotes Mary Perham on whether business property relief can be claimed on a furnished holiday let

The Tanner family is facing a significant inheritance tax bill of £1.1 million due to a dispute with HMRC over business property relief (BPR) eligibility for their furnished holiday let business.

The executors of her will initially claimed BPR to avoid the tax, believing the business qualified for relief. However, HMRC contested the claim, arguing that the holiday lets were primarily investment properties generating income from short-term rents rather than a genuine trading business. The First Tier Tribunal sided with HMRC, leaving the family with a substantial tax liability, although the case is open to appeal.

Mary Perham, Senior Associate, says that claiming BPR for holiday lets is notoriously difficult:

To qualify for BPR, there must be a genuine business (i.e. operating on commercial terms and not merely a hobby / side hustle) and that business (i.e. the business of letting the property) must be “wholly or mainly trading”, as opposed to being carried out for investment purposes. In this context, HMRC would expect more than 50% of business activity to relate to trading, with reference to various indicators established primarily through case law.

"For holiday lets to qualify, they must go well beyond the basic provision of occupation in return for rent (an investment activity). There must be significant additional services provided alongside the lettings. Some examples accepted by HMRC include welcoming visitors, being on site to deal with queries, arranging additional activities, providing meals, cleaning, newspapers etc. Even where these additional services provided, they must still meet the “wholly and mainly test”, so their inclusion alone is not enough. In Gertrud Tanner v HMRC the Court were not satisfied that this test was met.

It has been difficult to claim BPR on Holiday lets since 2013, when HMRC’s view that furnished holiday lets will generally not qualify was endorsed by the courts in HMRC v Lockyer, with several cases since reinforcing HMRC’s position. Gertrud Tanner is no different and serves as a reminder of the strict hurdle that those providing holiday lets need to meet .

"With the recent changes announced to BPR (cutting the relief significantly) and the governments ambition to “close the tax gap” it is likely that applications for BPR will be even more closely reviewed and challenged. This makes it crucial for those seeking to claim BPR (whether for holiday lets or otherwise) are keeping clear and substantiated records of their trading activities. In the context of Holiday Lets, this will include being able to demonstrate income attributed to trading activities linked to the additional services provided. Business owners should be wary about tackling this alone and if they intend to claim BPR they should seek professional legal, tax and accounting advice to ensure they understand the available relief, the stringent requirements and have appropriate records in place to maximise the chances of qualifying.

Read the full piece in MoneyWeek here.