Net tightens on Inheritance Tax relief for Furnished Holiday Lets

Posted by on Jul 8, 2015 in Research, Residential Property, Tax, Uncategorised, Uncategorized | Comments Off on Net tightens on Inheritance Tax relief for Furnished Holiday Lets

HMRC have recently won a tribunal decision that confirms that inheritance tax relief will only be available on furnished holiday lets (FHL) in exceptional circumstances. Simon Dixon Smith of Land Partners comments ‘the newly released case of Green v HMRC confirms that the majority of holiday lettings businesses will not attract inheritance tax relief. This will be costly to the families of holiday cottage owners’.

It is estimated that there are over 75,000 units of FHL in the UK. Many of these will have been purchased for the primary benefit of the owners with holiday lets offered as a way to mitigate management costs. Some will have been purchased with a view to generating income and mitigating tax liabilities.

Since 6th April 2011 offsetting losses of a FHL business against other income is no longer possible. Capital Gains Tax relief remains available where the higher let days threshold (105 days) is met after 6th April 2012.

For older property owners the ‘prize’ was the potential to secure 100% inheritance tax relief on a transfer of the property. This could increase the beneficiaries’ inheritance by as much as 166%.

The case of Pawson v HMRC [2011] and its subsequent appeal showed that HMRC were going to be tough on the relevant tests for relief. This position has now been confirmed by the decision of Green v HMRC [2015] that has just been released.

This First Tier Tribunal decision related to a group of 5 cottages on the North Norfolk coast. Inheritance Tax relief was claimed on a transfer of the property, with a significant immediate tax liability at stake. A successful and profitable business had been operating since 2003.

The critical decision for the Tribunal was whether this was a trading business or one of ‘mainly making or holding investments’. The taxpayer’s submission was that managing the marketing and bookings, the provision of a welcome pack, linen, heating, electricity, broadband, rubbish removal, cleaning and availability of a caretaker went beyond the normal investment activity of a prudent property investor.

These are the normal services that any property owner would expect to provide for their holiday cottage. The judge in this case confirmed that this was not enough to making a FHL mainly a ‘trading’ business rather than an ‘investment’ business. Inheritance Tax relief was denied. It is certain that considerable further services, more akin to a guest house or hotel, will be required if relief is to be granted.

‘Any property owner wanting to mitigate the capital tax liability on a holiday cottage must undertake appropriate lifetime tax planning rather than relying on inheritance tax relief being available on their death’ confirms Simon Dixon Smith.

For further information please contact Simon Dixon Smith of Land Partners on 01376 328297 or