Holiday Home owners who thought they may be able to use the business property relief (BPR) exemption to cut their inheritance tax (IHT) bills may have been thwarted by a recent decision by a tax tribunal – Thursday 1 February 2013.
This means that thousands of UK holiday home-owners who let out their properties have had their hopes of this important tax relief dashed. According to Tanya Powley writing in the FT today, around 65,000 owners of furnished holiday lets could be affected and could eventually be hit with big inheritance tax bills.
This follows the ruling by the Upper Tribunal on an appeal by HM Revenue and Customs overturning a decision from February last year which was in favour of the taxpayer.
HM Revenue & Customs (HMRC) has customarily treated furnished holiday lets, not as a business, unless there was a significant degree of service provision involved, but in the same way as all other investments, thus making them ineligible for the business tax relief. This would mean that holiday home owners are potentially liable to pay 40 per cent IHT on the owner’s death, after deducting the current personal allowance which is £325,000 (2011-12).
Back in February 2012, a first-tier tax tribunal ruled: “an intelligent businessman would not consider them to be investments” – bringing them (holiday homes) under the rules for BPR. This would have meant that individuals inheriting holiday properties would have been able to claim relief to reduce any IHT that became due.
Experts at the time said of the case: HMRC v Pawson, that it was a significant ruling as here was no real evidence that the owner in the case had “substantial involvement” in managing the properties...
The ruling had the potential to open the floodgates to many other claims, but Thursday’s decision has now reversed this.
Although the ruling was on a UK property, advisers believed at the time that the case could have implications for individuals with overseas properties as well.
It is not surprising therefore, given the financial implications to the Treasury, that HMRC is fully intended to appeal, hence yesterday’s new ruling.
Holiday lets have traditionally been seen as businesses by their owners but HMRC changed its guidance some years ago applying a stricter interpretation of business property relief in relation to furnished holiday lets.
It would seem that now only those owners providing a substantial amount of services to holiday makers could possibly get the relief. HMRC will treat holiday lets in the same way as other investments for tax purposes, making them ineligible for the tax relief granted to business, and liable to 40 per cent IHT on the owner’s death©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law; always seek professional advice. Legislation changes, so check dates on these articles. If you have questions go to the LandlordZONE® Forums