H M Revenue & Customs have persuaded judges in the High Court that a holiday let in Suffolk was an investment rather than a business and was therefore subject to inheritance tax.
Since 2008, the Revenue has conceded that furnished holiday lets that offered services can qualify for business property relief under the Inheritance Tax Act 1984 – which can provide 100% exemption from inheritance tax – but challenged whether this particular property was indeed a business.
The owner of the large bungalow, Nicolette Pawson, died in 2006. Mrs Pawson’s children (who co-owned the property with her) claimed that they provided the necessary services – cleaning, gardening and laundry, and a First Tier Tax Tribunal had in fact found in favour of the estate’s claim in 2011. However, the Revenue appealed and the Upper Tier Tax Tribunal has now overturned that decision, stating that the property was mainly held as an investment, so business property relief is not available and Mrs Pawson’s interest in the bungalow falls within her estate and is liable to inheritance tax.
The Revenue argued that the property was rented out with minimal advertising and service provision – the point seems to be whether a true holiday is being provided, or just accommodation, so whether it is a property letting business, or a holiday letting. The definition of a holiday letting for the purposes of income tax or capital gains tax is not used in relation to inheritance tax – it is just a case of deciding whether it is a business or an investment. In the Pawson case, there was just one property and the work needed to manage the lettings did not amount to much – the most common services that home owners offer to prove their holiday home is a business include cleaning and laundry services and provision of clean linen, bedding etc; provision of food supplies; provision of swimming pools or games rooms and so on.
The children have a month to appeal further but in the meantime, this decision could affect a number of furnished holiday home owners who are expecting to obtain business property relief on their deaths.