Holiday lets can provide new income streams
Providing holiday accommodation has long been a popular farm diversification. What may have started as letting a spare cottage during popular periods can become a significant year-round business using existing cottages and converted buildings often supplemented by new-build units or glamping pods too.
This is a predicted area of growth for farms and other rural businesses, particularly in light of Brexit, and is also an area investors are considering as an addition to their portfolios. Developing existing operations to generate both seasonal and out-of-season income, taking advantage of the growing ‘staycation’ trend, is bound to prove popular.
To convert existing facilities, or create new ones, is a significant investment to make, so it is important to clarify the legal and tax obligations from the outset. There can also be different tax advantages and pitfalls in furnished holiday lets, so advice from your solicitor and accountant is always essential in advance.
Planning permission must be considered in both instances, even if existing buildings are on your property, and no work should be undertaken before this is secured. Tenant farmers should also check with their landlord before proceeding.
Securing permission is usually a straightforward process, but in some instances there can be complications which can lead to delays. It is wise to leave enough time to factor in any potential delays, so any unexpected setbacks do not impact on your plans and budgets.
From a tax perspective, there is an ongoing discussion over whether Business Property Relief (BPR) can be applied to such a diversification, and what the differentiation is between a holiday cottage business and a property investment.
BPR provides relief from Inheritance Tax (IHT) on business assets at a rate of 50% or 100%, depending on the type of assets involved, how they are held and how long they have been held. BPR is therefore a very valuable relief for succession planning and can produce significant tax savings for beneficiaries.
HMRC’s standard position is that BPR cannot be applied to businesses that ‘consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments’ and they argue that this definition includes holiday lets on the basis they are generally owned as land investments, rather than as an income-generating hospitality business like a hotel or bed and breakfast.
However, there have been recent successful challenges to this ruling involving holiday lets, where it has been successfully argued that if the owner of the let is also providing a high level of service then BPR is available. However, to qualify, the amount of services performed would seem to need to be above those of a relatively standard nature.
In the case of Grace Joyce Graham (deceased) v HMRC, it was considered that additional services offered – such as homemade food and drinks, bikes, games, swimming pool, sauna and gardens, alongside personal touches and time of the owner – distinguished the let from a typical holiday letting investment, as it was more akin to a family-run hotel and thus BPR was allowed. However. until HMRC formally changes its position, this will remain the exception rather than the rule. It is wise to clarify your tax liabilities from the outset and to establish the nature of your business and what is to be intended.
Diversification as a rural business can undoubtedly hold significant potential, but advice should always be sought if there is any doubt about the process or resulting obligations.