Investing in land – the latest BPR case

Many family business owners (whether individuals or trustees) will be familiar with the requirements of Business Property Relief ('BPR'). BPR is a very valuable relief from inheritance tax ('IHT'); it can provide up to 100% relief on the market value of qualifying assets.

However, relief is not available where the business activities wholly or mainly consist of making or holding investments.

There have been a series of cases over the years on the circumstances in which BPR is available on property-letting businesses, with a good number focussing on its application to caravan parks and furnished holiday lets and, in one case, an industrial estate.

Following on from this, the First Tier Tax Tribunal recently considered the availability of BPR in the context of a chain of ‘aparthotels’ in its decision in Firth and Firth (as Trustees of the Batley 1984 Settlement) v Revenue and Customs Commissioners [2022] UKFTT 219 (TC).

The Batley 1984 Settlement held shares in an unquoted trading company, The Lawrance (Hotel Living) Limited.  In November 2014, a ten-year IHT charge arose on the Settlement. The trustees, Mr and Mrs Firth, claimed BPR but HMRC denied that this was available on the basis that the services provided were not sufficient to prevent it from being an investment business. Mr and Mrs Firth appealed this decision.

The Lawrance was described as an aparthotel – a hybrid of self-catering accommodation and a hotel. The Lawrance was spread across four different buildings in York and Harrogate and rooms could be let for one, three nights or more. One of the locations contained an on-site café which was also open to the public.  Certain additional services were available. Was the business wholly or mainly holding investments?

It has been established that ‘wholly or mainly’ means more than 50%. The Tribunal reviewed the spectrum of case law before it (much of which has gone against the taxpayer). There was no dispute that The Lawrance was a business but it was necessary to look at that business and all factors in the round, and apply a qualitative not quantitative test.

The Tribunal considered a wide range of factors such as maintenance, staffing, the extent and frequency of refurbishment, the presence of a reception, concierge and/or out-of-hours service, in assessing whether the real nature of the business, looked at in the round, and qualitatively, was investment in land with ancillary services (no BPR) or a service business with ancillary investment in land (BPR).

As with all BPR claims, the case turned very much on the specific facts and evidence presented. The trustees sought to establish that the business involved additional services above and beyond the provision of accommodation. Oral evidence was provided by employees and the managing directors as well as documentary evidence. It is clear that any statement made to the Tribunal needs to be supported by contemporaneous documentation rather than “assertions”. In this case, the trustees argued that the reception presented a “continuous interaction and involvement with guests”. However in practice the reception was open for less than one-third of the time and guests were not encouraged to use the out-of-hours service due to potential (very) large charges for doing so. It also became clear that the café contributed only 3-4% of the business’ turn-over.

As a result, the Tribunal rejected the taxpayers’ argument that the business was one akin to a ’boutique’ hotel.  It concluded that when examining the non-investment services provided, these were considered to amount to very little (well under the 50% necessary).  It concluded that both the quality and quantity of services (non-investment type activity) did not outweigh the investment elements (income derived from occupation of the properties) and therefore the company shares did not qualify for BPR.

It is not that surprising that the denial of BPR on FHLs has now extended to a ‘no-frills’ hotel business, but it remains to be seen how far the arguments will go. Firth is a clear reminder that the key for any property based business hopeful of a BPR claim is the level and nature of the guest services provided and these should be considered very carefully in the light of the FHL cases and this decision, and that any claim will need to be carefully and comprehensively evidenced.