In a move that has caused widespread consternation, and which could potentially affect 65,000 UK holiday home owners, a High Court judge sitting on the Upper Tier Tribunal has ruled that a holiday let is subject to inheritance tax (IHT) on its value.
This could mean increased IHT bills for the estates of holiday let landlords.
Pawson case
The case in question related to the 25% share of a Suffolk bungalow owned by one Nicollette Pawson. She owned the property jointly with her son and daughters and let it out for holidays.
As part of the holiday letting process, the family carried out related activities, such as cleaning between lets, maintaining the garden, providing telephone and television and replenishing cleaning supplies.
When Mrs Pawson died her daughters, as her executors, claimed that her share of the property qualified for 100% relief from IHT, because it was business property. HMRC refused the claim, arguing that if there was a business at all, it was actually a business of holding investments. It therefore did not qualify for the relief.
The executors appealed to the First Tier tribunal, which ruled in their favour.
Appeal to the Upper Tier Tribunal
HMRC appealed that decision to the Upper Tier Tribunal and a hearing was held in December 2012. At the end of January this year, the Upper Tribunal found in favour of HMRC.
The appeal turned on the question of whether the letting of the bungalow as a holiday let was primarily an investment business. Did the activities carried out by Mrs Pawson and her family go beyond that which would normally be carried out in a business that holds property as an investment?
Nature of the property
According to Mr Justice Henderson, the answer was no.
â The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property,â he said.
â Looking at the business in the round, there was in my view nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and certainly no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature,â he added.
What happens now?
It might still be theoretically possible to successfully claim relief from IHT on holiday lets, if you can show that the services provided went above and beyond those normally expected in a holiday let. However, it would be a difficult matter to predict.
The best advice would be to think carefully about your inheritance tax exposure at an early stage. This is particularly important given the governmentâs recently announced decision to delay any increase to the IHT threshold of £325,000 until 2019.
