HMRC Wins Case Over Furnished Holiday Lets

4th March 2013

Landlords of properties classed as furnished holiday lets are once again facing changes in tax treatment. Their estates will now have to pay inheritance tax (IHT) after a court ruled in HMRC’s favour.

A previous tribunal decision in Pawson v HMRC (2012) held that furnished holiday lets should not be considered an investment business for inheritance tax purposes and that Business Property Relief was available. This has now been overturned by a High Court judge sitting in the Upper Tier Tribunal. The HMRC successfully argued that holiday lets should be categorised with other buy-to-let and rental property, so that it can charge inheritance tax on the owner’s death.

The issue in Court was whether or not it was ‘mainly’ an investment business. The judge agreed with HMRC that the activities of finding occupiers and maintaining the property outweighed the additional services and facilities. The fact that the property was actively managed, as opposed to being passive, was not sufficient. The late Mrs Pawson’s estate had argued that by advertising and taking bookings, cleaning between lets, providing bed linen, telephone and televisions and offering a cleaner, caretaker and gardener, they provided ‘services’ to holidaymakers, but once weighed in the balance these were held not to be enough. The Judge emphasised that the services provided were all of a relatively standard nature and were aimed at maximising the income from which the family could obtain from the short term holiday letting of the property.

In a sense we are back where we started with the same degree of uncertainty for those holiday let owners considering their IHT position. Relief from IHT remains theoretically possible but it will be difficult to achieve. Holiday let owners need to review the services they provide and ensure that they will be deemed substantial enough to fall within the trade line rather than investment line.

Up until 2010/11, furnished holiday lettings were particularly attractive investments as they also allowed loss relief against other sources of income and gains, as well as qualifying for relief against IHT.

Stacey Hogg of George F White comments “The first tier tribunal decision did seem to fly in the face of other decisions on Business Property Relief. However, it will disappoint the owners of furnished holiday lets who will now struggle to convince the HMRC that BPR should apply. Anyone claiming BPR will have to argue that the services element outweighs the investment element and that won’t be straightforward”.

It is understood that the Executors of Pawson are planning to take the case to the Court of Appeal.

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