THE Upper Tier Tax Tribunal has considered the criteria for the letting of furnished holiday accommodation to be considered a business, in order to qualify for Business Property Relief from Inheritance Tax (IHT).
IHT is chargeable on a person’s estate when they die and is also sometimes payable on trusts or gifts made during someone’s lifetime.
The tax is payable at 40 per cent on the amount over the Nil Rate Band threshold (currently £325,000) or 36 per cent if the estate qualifies for a reduced rate as a result of a charitable donation.
Business Property Relief can provide relief from IHT at rates of up to 100 per cent and consequently it is a very valuable relief.
Prior to 2008, HMRC were generally content to accept that these lettings qualified for relief, on the basis that holiday letting was not a business of ‘wholly or mainly holding investments’.
They changed their stance, in late 2008, when they announced that they had been advised that their previous practice was incorrect in law and they stated that they intended to litigate a suitable test case on the issue.
The test case chosen was the ‘Pawson case’.
Mrs Pawson died in 2006 and had owned a share in ‘Fairhaven’, which was let as furnished holiday accommodation prior to her death.
The property was furnished and equipped with a telephone and television. Additional services such as cleaning between lettings, gardening, heating, hot water (which was turned on before guests arrived) and a welcome pack were provided to holidaymakers.
The First Tier Tribunal found for the taxpayer and held that the business should not be considered an investment business for IHT purposes and that Business Property Relief was available.
This decision was recently overturned by a High Court judge sitting in the Upper Tier Tribunal. The HMRC successfully argued that holiday lettings should be categorised as investment activities, along with other rental property, and therefore may be liable to IHT on the owner’s death.
The Upper Tribunal found that the approach to be taken in assessing whether a holiday letting business was an ‘investment business’ was to ascertain whether or not the activities which related directly to the supply of the use of the property (such as finding occupiers and maintaining the property) outweighed the additional services and facilities (such as cleaning, heating, hot water and telephone).
The Upper Tier Tribunal found that the additional services did not outweigh the property related services in the Pawson case.
It is understood that the executors of Pawson are planning to take the case to the Court of Appeal.
This is not good news for owners of holiday lets and may result in a high level of uncertainty. Owners may wish to review their circumstances and take appropriate steps to protect their estate. Our tax department can provide support in all aspects of tax planning.
If you require further information please telephone Mairi Drummond on 01573 224391 or email email@example.com.