Property rental businesses count as investments for inheritance tax purposes and so don’t qualify for business property relief. Are there any exceptions to this rule?

Business property

Business property relief (BPR) is one of the most valuable inheritance tax (IHT) reliefs available. Where the conditions are met, BPR can take up to 100% of the value of assets out of the IHT net. Among the assets that BPR can apply to is “a business, or an interest in a business”. This seems straightforward, but HMRC’s view of what constitutes a “business” for BPR purposes might not match yours.

Property business

BPR for assets used in a business which involves the letting of land or property is tricky. HMRC will almost certainly refuse any such claim, citing that “exploiting land is a passive activity”, essentially an investment. To succeed with a claim you’ll need to convince it that the business is wholly or mainly trading. You’ll have to be prepared to take your argument to a tax tribunal. In 2018 the personal representatives of the late Mrs Grace Joyce Graham (G) did exactly that and succeeded in persuading the First-tier Tribunal (FTT) to allow their BPR claim.

The Graham case

The business in G’s case was a furnished holiday let (FHL), i.e. short-term lets, which in G’s case were to guests typically staying for a weekend or week. The lets included a significant level of hands-on services. FHLs receive favourable income and capital gains tax treatment, but this does not automatically extend to IHT. For BPR to be available, G had to show the FTT that the non-investment side of the business (the services provided in addition to the right to use the accommodation) outweighed – that is more than 50% – the passive investment side.


G provided a number of services that were over and above what you would normally expect from a holiday letting. In addition to accommodation of self-contained flats, guests had access to extensive leisure facilities, including a heated pool and a games room, were provided with fresh flowers and linen, and were personally looked after by the proprietor and her daughter. The FTT decided that the extensive services “just predominated” the passive letting and allowed the claim.

Door open?

The decision is a rare win for the taxpayer. However, it’s unlikely to mean a flood of successful claims will follow.

Tip. Because the judge said that the case “just” passed the test, you can use it as a benchmark that you will have to at least equal.

If you are running an FHL business, look at the services you provide to guests. If these are substantial, start planning ahead and see if you can make a convincing case for BPR to apply.

Tip. A good way of documenting this is to allocate your expenses and staff working time between cost centres. Also issue guests with composite invoices that clearly show a breakdown between charges for accommodation and services.