Holiday lets no longer eligible for inheritance tax relief as HMRC wins appeal

Business Property Relief from Inheritance Tax is available at 100% for a trading business (not an investment or property business) which has been owned for two years.  For example, if someone has owned a manufacturing company for over two years, there will be no Inheritance Tax payable on the value of the shares of the company in the event of his or her death.

What is Business Property Relief?

Business Property Relief is available at only 50% for any land or building, plant or machinery owned by a partner or controlling shareholder but used by the business.

There are several cases which have looked at whether Business Property Relief should be available and whether or not the company is a trading or investment company.  Mainly, these are in situations where part of the income of the business is from investment and property and part from profit from trade.  It can be difficult to determine whether Business Property Relief will be available, although this is, of course, a very important issue when considering how much Inheritance Tax may be payable in the event of death.

The Pawson case

The property was let fully furnished as a holiday home and was jointly owned by Mrs Pawson and members of her family.

The First Tier Tribunal had allowed the executors to claim business property relief on Mrs Pawson’s share of the holiday home. The Tribunal considered that the property had been used for the purpose of a business carried on for gain. The Tribunal ruled that because services were provided such as maintaining the garden, cleaning and providing bed linen this was not an investment business. The holiday let was considered too active an operation to be an investment business.

However, HM Revenue & Customs appealed to the Upper Tribunal, which overturned the First Tier Tribunal’s ruling.

The Upper Tribunal stated that the services that were provided were all of a standard nature and there was nothing to distinguish it from any other actively managed letting business of a holiday property. There was no evidence that Mrs Paswon had substantial involvement in managing the property. As it was considered by the Tribunal to be an investment business, it did not qualify for business property relief.

Mrs Pawson’s executors are raising funds to take the matter to the Court of Appeal. However, it would seem that only those providing a substantial amount of services to holiday makers will be eligible for business property relief on furnished holiday lets.

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To find out more about Inheritance Tax and Business Property Relief, please contact Hannah Pearson using the details provided below.

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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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