It is that time of year again when we all look forward to our summer holidays and many of us will choose to staycation here in Scotland. You may be glamping in the Hebrides, relaxing in a boutique hotel in Perthshire or in my case, enjoying a week in a self-catering cottage in Orkney.
If you're an owner of one of these businesses and have worked hard over the years to build up a successful enterprise, you may want to ensure you can pass on your businesses to the next generation.
What is Business Property Relief (BPR)?
BPR works to relieve the value of business assets in your estate from Inheritance Tax. The rationale is to prevent viable businesses having to be sold or put into liquidation after the death of an owner, simply to pay the tax.
How much is the relief worth?
If you are a sole trader, trade as a partnership or own shares in a private limited company, the rate which applies is 100% of the value of the business assets after deduction of any liabilities.
You can also obtain relief at the rate of 50% for any assets which you may own personally but allow the partnership or company, in which you have an interest, to use for the purposes of the business (although in the case of company shares you must also own at least 50% of the company's shares to qualify).
The individual must also have held the assets in question for at least two years prior to their death. There are certain exceptions to this rule but if this is a point of concern, it's worth seeking legal advice.
Businesses wholly or mainly holding investments.
However, not all businesses will qualify for BPR. The Inheritance Tax Act 1984 includes an important restriction on its availability.
S.105(3) denies the relief if the business consists of " wholly or mainly one or more of the following that is to say dealings in securities, stocks or shares, land or holdings or making or holding of investments".
This serves to exclude businesses that do not trade in their own right, but mainly hold investment assets such as stocks and shares, or importantly here, property.
What does this mean for the owners of holiday accommodation?
The answer is not always clear, but the basic premise is that if your business is centred around the exploitation of land and very few other services are provided in addition, then your business is unlikely to qualify for BPR.
HMRC is very active in this area and has been successful in a number of cases concerning the provision of holiday accommodation.
These cases demonstrate that while each situation will ultimately be determined on its own facts, there is a spectrum where, at one end, a business is likely to qualify but at the other end, it will not.
The owner of a hotel business will usually always qualify, as the level of service offered usually goes far beyond just the provision of accommodation. At the other end of the spectrum, an investment in a holiday let where the main activity is the short-term lease of property, will only qualify in exceptional circumstances.
This is notwithstanding the fact that furnished holiday lettings are treated as trading entitles for the purposes of income and capital gains tax.
To date there have been very few cases where owners of a furnished holiday let have been successful in claiming BPR. In the case of Personal Representatives Graham v RCC, the judge found that the level of additional services offered in addition to the accommodation were so high that the business was more akin to a family-run hotel than a second home leased out to third parties for holidays.
Other similar businesses have also attracted HMRC's attention. Notably in George & Anor v IRC, BPR was refused in relation to a caravan park on the basis that the business was centred on an investment in land. The Court of Appeal allowed an appeal on the basis that the holding of land was just one element of this family-run business and not even the main element. BPR should not automatically be excluded simply because the business involves the use of land.
However, much seems to depend on whether the customer seeks the services provided by the business or just the use of the land and any services provided are purely ancillary.
What about holiday accommodation ancillary to another business?
Many businesses have diversified to offer holiday accommodation in addition to their core business. This includes estates and farming enterprises.
If these activities are relatively small in relation to the overall business, then BPR should be available on the full value of the business including the additional investment activities.
However, if these activities start to predominate then the business owners risk losing BPR completely.
Again each case is fact specific. However, HMRC will look at each business in the round. They will examine time spent on each activity, the value of the assets used as well as the turnover and profit generated by each area of the business.
However, this area does give rise to some planning opportunities. If the trading activities predominate and investment activities are small the investment activities can be incorporated into the wider business so that BPR can be claimed on the value of the whole business.
On the other hand if over time increased attention is paid to investment activities, rather than risk losing BPR on the whole business, these activities can be carved out and held by a separate enterprise. This would allow BPR to be claimed on the remaining trading activities.
BPR is a particularly complex area and therefore, it is recommended that you seek professional advice if it is of concern.
However, whatever you do this summer, you will hopefully enjoy a well-earned break.
Contributor
Associate
