A recent ruling by the High Court could have significant implications for anyone who rents out property as a holiday home.
While achieving furnished holiday letting status means the property qualifies for certain tax benefits, such as any profit on its sale being liable for capital gains tax at just 10 percent, the position surrounding inheritance tax is nowhere near as clear cut.
Previously, the First-Tier Tax Tribunal ruled that holiday homes which are let out qualify for Business Property Relief (BPR), making them exempt from inheritance tax and providing another avenue for minimising an estate’s liabilities.
However, that decision was appealed against by HM Revenue & Customs (HMRC), with the Upper Tribunal ruling this January that holiday homes qualify as an investment rather than a business.
According to Mr Justice Henderson, the fact that an active business is carried on in running the property as a holiday home does not prevent it from being considered as an investment business.
He added that in any normal case, even an actively managed property letting business would not qualify for BPR, with only businesses at the far end of the spectrum having an extensive enough service provision to override this.
Consequently, the High Court’s ruling will have a significant impact on the owners of thousands of other furnished holiday lets, especially if they let out just a single property.
The family in question is now set to take their case to the Court of Appeal but, in the meantime, there are a number of actions that people affected by the ruling could take.
Firstly, they should consider switching borrowings to holiday properties and examining whether there are other ways in which BPR eligibility could be achieved. Furthermore, they should also keep detailed records of their involvement with running the holiday let and the services provided.
However, it is important to seek professional advice before taking any action, so for further advice on BPR or any other inheritance tax issues, please contact us.