The Inheritance Tax treatment of furnished holiday lets has been a thorny issue for many years with Executors of estates and HMRC disagreeing over the correct interpretation and tax treatment in estates of people who die owning such properties.
Inheritance Tax is generally due if somebody has assets in excess of £325,000 unless they have the Transferable Nil Rate Band following the prior death of a Spouse/Civil Partner (in which case they would have up to an extra £325,000) and the Residence Nil Rate Band which can increase the tax free allowance for those who are passing the residential property in which they live to what is termed as linear decedents.
The conflict regarding furnished holiday lets has been in relation to the use of Business Property Relief (BPR). BPR applies to reduce or completely remove the Inheritance Tax charge on certain types of business asset. The aim of BPR is to ensure that businesses can continue to run without the risk of the business facing a huge tax charge upon the death of the proprietor of the business.
The regulations however do not allow BPR to be claimed if it is seen as an investment business such as for instance buy to let properties. Holiday lets however could be seen as an anomaly with owners seeing their properties as more than mere investment properties but with HMRC having the viewpoint that this is exactly what they are.
The interpretation of the law generally by HMRC is that a furnished holiday let is an investment business not what is termed a relevant business. Advertising, making bookings and the repair/upkeep of the property is deemed insufficient to make it a relevant business and thus generally Inheritance Tax will be due on that element of your estate.
The recent case of Joyce Graham (Deceased) v HMRC has further discussed the issue. In this particular case the family ran four self-contained flats. The court held in this instance however in favour of the family rather than HMRC and therefore BPR was available to them. The key to this case however was that the family went well above the level of an investment business. In particular they:-
- Provided a well looked after, cleaned and maintained Swimming Pool
- Kept incredibly well maintained gardens/grounds
- Had available bikes to hire
- Provided a barbeque area
- Stocked the flats with provisions e.g. tea, coffee, marmalade, linen etc.
In particular they were deemed to provide an incredible level of support and advice for guests and the family and people they employed put in a great deal of hours to make the guest’s stay memorable
It is indeed a welcome result that all is not lost regarding Inheritance Tax relief on furnished holiday lets, however it is still a very tricky area and legal advice is a must to those who own them so that their estate planning can be done in such a way to maximise the reliefs available.
For information on inheritance tax or any other private client matters please contact Associate Solicitor Andrew Steel or another member of our Private Client team.
Full information on Inheritance tax can be found on the GOV.UK website.
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