Farms and estates may be looking to holiday accommodation as a way to secure income for the business, against the backdrop of growing demand by holidaymakers.
Inheritance tax (IHT) relief may not be available for buildings no longer used for farming so this can also make converting properties to holiday accommodation attractive.
Diversifying the farm or estate can secure a viable business for the next generation. This needs careful planning so your heirs are not burdened with IHT when they inherit.
You may qualify for business property relief (BPR) from IHT on the new activities but only where the business is wholly or mainly trading. BPR does not apply where the business is wholly or mainly investing in land. For example, the family run hotel business can be a trading business and qualify for BPR. The letting of houses is an investment in land and will not qualify for BPR, although it may qualify for BPR if it is a small part of an overall trading business. The test is 51% trading and 49% investing in/letting out property. HMRC look at where income, profits and capital value come from, where time is spent, and the historical context. This allows 49% diversification on the farm or estate without losing IHT reliefs. The risk is that you fall on the wrong side of the 51%/49% test and your heirs are burdened with IHT when you die.
The problem is that there is a grey area in the middle - holiday let businesses with services and facilities provided to holidaymakers. In the recent case of Cox (Executors) v HMRC, furnished holidays lets within a larger house were held by the tax tribunal not to qualify for BPR. It was held that most of the services were only incidental or ancillary to the investment in land and so not helpful for BPR purposes. It was further held that although helpful to BPR - providing books, DVDs, information leaflets, tennis and badminton racquets, crab lines, frisbees, and bucket and spades - in this case was so insignificant as to be negligible. Our earlier blog on this is here. This is the latest of a number of cases which show that qualifying for BPR is very difficult for furnished holiday let businesses unless they provide extensive services - similar to those expected of a hotel. The Office of Tax Simplification (OTS) did recently recommend that furnished holiday let businesses should qualify for BPR, but the recommendations have not been taken up by the government.
If BPR does not apply to your holiday lets then your heirs may inherit assets they then have to sell, or burden with debt, to pay IHT, and the viability of the business may then be at risk. There is other planning which can be done. The business can be split into two to protect the trading activities (the farm) from the non-trading activities (the holiday lets). This can be taken further and the non-trading activities gifted on. It is important to involve the next generation in the planning because diversification by them after receiving the gift can mean a clawback of the original IHT relief. Insurance could be taken out to pay the IHT bill.
Please do get in touch if you think we might be able to help.