Posted by Tax Innovations on 21 Feb 2013

Inheritance Tax on Holiday Lets

An HM Revenue & Customs (HMRC) Upper-tier Tribunal hearing a tax case involving the Inheritance Tax (IHT) treatment of a furnished holiday cottage has recently delivered a decision which will be of concern to owners of similar properties.

There is a beneficial IHT tax relief called “Business Property Relief” (BPR) available for businesses which form part of a deceased’s estate, but this treatment is not available if the business’s main purpose is deemed to have been holding investments, including land/property.

At the initial hearing, the First-tier Tribunal found in favour of the deceased’s personal representatives, i.e. that the holiday rental business’s main purpose was not in holding an investment (the cottage) and therefore BPR was available. Among other factors, the grounds for this decision included the level of services provided to guests, the amount of extra work generated by having guests staying for only short periods, and that the activities were clearly performed with the view to making a profit.

This decision was a surprise, as in general furnished holiday properties had not previously enjoyed BPR, and it was therefore welcomed by the tax profession.

The Upper-tier Tribunal has now delivered its judgment, overturning the original decision and denying BPR in this case.

In its decision, the Upper-tier Tribunal stated that as a starting point the main activity of any business involved in holding land/property in order to obtain income is an investment in nature, and the fact that the property may be actively managed will not generally change this. Furthermore, when considering the services provided at the cottage (cleaning, fresh linen, gardening etc)  the tribunal commented that these were “relatively standard” and “did nothing to distinguish it from any other actively managed furnished letting business”.

An appeal could still be made against this decision, but as things stand it would seem that in all but the most exceptional cases, BPR will not be available for furnished holiday lettings.

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