Farming Partnership Loses Holiday Cottage Tax Claim


With demand for staycation holiday property outpacing supply, this recent case [2021] UKFTT 0193 (TC) provides a salient reminder on the need for owners (in this case a farming partnership) to plan all stages of the transaction for tax purposes (and for all the stakeholders involved).



Not only with regard to the fundamentals of capital v revenue for tax purposes but also if you are going to incur expenditure for a new business make sure you have a clear intention to actually carry on that business. Crucially here, the farming partnership never had plans to actually operate the FHL business - it was always the intention for it to be transferred on completion and owned/operated by one of its partners instead.


Case Background


This is rather an old-fashioned case on two key pillars of tax law: capital v revenue and wholly and exclusively. The background is work on a large, listed 18th-century house on farmland to turn it from something which was ‘increasingly uninhabitable’ to being a luxury holiday home that would obtain a ‘4-star Visit Scotland rating with the grandeur of a Classic Big House’.


The hill farm in North Scotland had been struggling for some years and the owners had been served with a statutory repair notice for a disused listed building on the land. The farming partnership sought outside help and investigated the feasibility of a holiday let business with business planning, development grants and Historic Scotland funding. The total project cost was £929,478.


Capital v Revenue


The Tribunal reviewed the extensive case law and had no real difficulty in deciding that this was a capital improvement and not a repair. There is nothing particularly new in the decision, but it is a useful reminder of some basic principles. The works went way beyond the statutory repair notice and the clear intention was to create an entirely different revenue generating asset.


Partnership Dissolved Before FHL Trade Begins


Since the Capital v Revenue point was lost, FTT did not need to consider the nature of the expenditure and the farming partnership trade further but for completeness it did and this is perhaps the more interesting second limb of the case ― whether the expenditure was incurred wholly and exclusively for the purposes of the trade?


The unusual point here was that the expenditure was incurred by the farming partnership but by the time the work was done there were already plans for the partnership to be dissolved and for one of the former partners to take on the property to run as a holiday home.


The Tribunal decided that even had the expenditure not been capital it was not incurred for the purposes of the farming trade but for the holiday home business. That was not a trade being carried on by the partnership and so the expenditure could not have been an allowable deduction in the partnership tax computation. A situation and conclusion that would also preclude a claim for capital allowances by the farming partnership instead.


A copy of the case can be found below and if you have any questions, please get in touch.


MESSRS ELLIOT BALNAKEIL v HMRC TC08143 2
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