What is Business Property Relief (BPR) and when can you claim BPR?
Business Property Relief is an important tax relief for Inheritance and Estate Tax planning. This reduction can be 50% or 100% on the qualifying business asset depending on the circumstances. The relevant business asset must have been owned for two years prior to the date of death and it must be wholly or mainly for business activities (more on this later).
Unquoted shares will qualify for 100% reduction if the above conditions apply, while quoted shares, with a controlling interest, will attract a 50% reduction. Additionally, any business assets owned by a company the deceased controlled, or that were controlled by a partnership of which they were a member will qualify for a 50% reduction on Inheritance Tax payable.
Importantly, the exploitation of land for profit is seen as an investment activity as such rental or Airbnb ventures fall outside the scope of Business Property Relief BPR. So, what do you have to do to qualify for BPR on your holiday letting or Airbnb business?
Investment Activity or Business Activity?
The crucial point for attracting BPR on any business is satisfying the condition that the asset or business is wholly or mainly for business activities. HMRC, along with judicial bodies, have provided guidance on this matter, emphasizing the need for a substantial business presence rather than mere investment intent. In Inland Revenue Commissioners v George [2003] ("George"), it was held that property businesses do not generally qualify for BPR as they are primarily centred around the exploitation of one's land for profit, which qualifies as an investment activity not a business activity. HMRC, as well as the courts and tribunals, have made clear that in order to claim BPR you must apportion your income to services provided as business activity and rental income as investment activity, at which point you can only qualify for BPR if the business activity is the main part of the business.
The distinction between Investment Activity and Business Activity can be difficult to pin down, in McCall v HMRC [2009] the Tribunal decided that the test for this is based on what an "intelligent businessman" would think, not what a land lawyer would think. This meant that In Anne Christine Curtis Green v HMRC [2015], Linen, welcome packs and even a full-time caretaker were not sufficient to tip the scales to mainly business activity.
In the Executors of Grace Joyce Graham v HMRC ("Graham") the court made clear that you should separate the business components and determine whether each individual component is a business activity or an investment activity. In this particular case the tribunal found in the taxpayer's favour, reasonably agreeing that the leisure facilities, bike rentals, taxi service, extensive holiday advice and planning assistance as well as welcome baskets and free fruit and vegetable grown on the property were all sufficient to consider the activity as mainly business activity and not investment activity.
What do you Need to do to Attract BPR on your Rental properties?
In order to tip the scale towards business activity you will have to ensure that you offer sufficient services to make the majority of your activities business related rather than purely investment. The tests set by the cases of George, McCall and Graham establish that the majority of your income or activities should be related to business activities, the test is what an intelligent businessperson would perceive and finally you must separate the business into its components, establish which components are business and which components are investment before stepping back and reviewing the business as a whole.
The following strategies could help tip the scale towards Business activity and help attract BPR relief for your rental business.
- Diversify Services – Expanding beyond the traditional rental income model can help create a hybrid business. These services can range from concierge services, transport, security and cleaning services.
- Enhance Amenities – Investing in a variety of amenities could boost commercial returns while diversifying the business portfolio, Gyms, laundry facilities, parking and recreational areas are all great ways to further diversify your business and enhance its business activities.
- Plan and Track your Processes – Attention to detail and record keeping could be crucial to claiming Business Property Relief. Ensuring you know the sources of your revenue and showing clear intention of enhancing and expanding your business activities can help prove to HMRC that the purpose of your activity is business rather than investment.
- Seek Professional Advice – Having professionals help advise you on the process is a clear and easy way to ensure you are making the right steps towards protecting your assets and minimising your tax exposure.
By focusing on diversifying your business model and carefully tracking and planning your activities it may be easier to convince HMRC your rental or Airbnb business is not purely an investment activity, resulting in a significantly lower tax burden for you and your loved ones.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.