Hopes for holiday lets just castles in the air
Tax reforms have not been kind to owners of furnished holiday property in recent years. Tax relief for losses was restricted in 2011, and the qualifying conditions for the remaining tax benefits were tightened up the following year.
Now an Upper Tribunal (Tax and Chancery) decision has dashed hopes of most furnished holiday homes qualifying for inheritance tax (IHT) business property relief (BPR). The decision in HMRevenue & Customs v Pawson overturns a First-tier Tax Tribunal decision from 2011. The original decision would have meant that BPR was available despite only minimal services being provided.
BPR is available in respect of a property business, but not where it consists wholly or mainly of making or holding investments. The Upper Tribunal decided that where the principal business activity involves deriving income from the occupation of land, then the starting point must be that the business is mainly one of investment. Only at the upper end of the spectrum of possible letting businesses will the extent of services provided be more significant than the investment aspect.
The property in question in the Pawson case was a typical holiday letting, but the services provided – just cleaning between lettings and a gardener – were fewer than offered by most holiday lets. Despite this, the decision is likely to mean that very few holiday lettings now qualify for BPR.
The question is, just what level of service is required to override the assumption that holiday letting is an investment business? HMRC currently accepts that a bed and breakfast establishment or a hotel will usually qualify for relief on the basis of the level of services provided, but is there really that much difference? Some holiday lettings provide a breakfast service, and in a hotel this might be just on a self-service basis. For now, however, it’s bad news for owners of holiday lettings.