26 July 2022
In the first case of its kind, the availability of inheritance tax (IHT) relief has been considered in the First-tier Tribunal (FTT) for serviced apartments. It could prove a costly decision for those running serviced apartment business.
In the case of Mr Bruce Firth and another v HMRC and another v HMRC, the availability of business property relief (BPR) on a serviced apartment business was considered. Despite a passionate argument that ‘The Lawrance’ provided luxury, hotel-type services, the evidence did not stack up in the taxpayers’ favour and BPR was denied.
BPR is a very valuable IHT relief which can provide 100 per cent or 50 per cent relief from IHT on the market value of qualifying assets. However, relief is not available where the activities wholly or mainly consist of dealing in securities, stocks or shares, land or buildings or making or holding investments.
In this case, Mr and Mrs Firth as trustees of the Batley 1984 Settlement, appealed against HMRC’s notice of determination issued in 2018 which denied the availability of BPR claimed against a ten-year anniversary charge on the value of ordinary shares held in a business which provided 4-star, gold standard rated serviced apartments.
The aparthotel in question consisted of four individual apartments in larger buildings in city centres which could be let for one, three nights or more. In presenting their evidence, the taxpayer argued that the activities were predominantly non-investment related because their services offered a guest experience similar to a luxurious hotel and not a standard serviced apartment or holiday let.
The FTT weighed up the documentary and oral witness evidence provided, against a body of case law precedent. They concluded that the witness was ‘over egging the pudding’ and whilst they acknowledged the passion and intention (the business had been carved out of a property investment group), the services provided were in no way exceptional. The analysis of the services provided, included:
- The aparthotel offered services such as breakfast and romance packages but there was limited evidence of the time spent by employees providing these services. Staff time was more actively engaged in setting rates, dealing with bookings and maximising occupancy;
- Providing food accounted for just c3 per cent of the business’s turnover;
- Reception services were available for only a third of the week;
- Limited car parking and out of hours services were available and the guests were discouraged from using out of hours services due to potential large charges for doing so;
- The witness’s evidence of a ‘concierge service’ included examples such as a shower gel refill on request during out of hours. It was considered that this was unlikely to be a common request due to the large, fixed shower gel containers installed; and
- Cleaning was mainly after checkout unless requested at an additional charge.
The FTT found that both the quality and quantity of non-investment type activity did not outweigh the investment elements and the aparthotel company shares did not qualify for BPR.
The FTT considered the evidence provided by the taxpayer to be problematic, as they ‘over egged the pudding’ by making passionate assertions without supporting evidence. Whilst this case itself does not set a precedent, it’s an important reminder of the need to keep contemporaneous evidence of non-investment type activity where the availability of BPR is at stake.