Inheritance Tax Ruling a Blow for Holiday Home Owners

So where are Holiday Cottage owners left after last week’s successful appeal by HMRC in the Pawson case?

The late Mrs Pawson owned a 25% share of ‘Fairhaven’ a large bungalow on the Suffolk coast. Her daughters, who owned the remaining share of the property and who were the executors of her will made a claim for Business Property Relief (BPR) from Inheritance Tax following her death. HMRC refused the claim so Mrs Pawson’s executors took the case to the First Tier Tax Tribunal.

At this hearing, held in November 2011, executors of Mrs Pawson demonstrated services being provided with the holiday let. These included advertising for and securing tenants, cleaning between lets, provision of bed Iinen, provision of telephone and television along with maintaining the garden by employing a gardener. Services commonly provided by most holiday cottage owners.

At this hearing the tribunal found that the holiday letting could be taken to be a business and not simply the exploitation of an interest in property. To many observers this was a surprising decision given there was only one holiday unit and minimal services were provided.

Needless to say HMRC disagreed and sought leave to appeal on various grounds but were only allowed to appeal on a point of law, being;

‘It (the tribunal) formulated and applied the wrong test in assessing whether the Property was held wholly or mainly as an investment.’

HMRC appealed to the Upper Tier Tax Tribunal which last week announced its decision. This time the Tribunal came down firmly in agreement with HMRC and decided that the Property was in fact an ‘investment business’ therefore denying the availability of BPR and bringing the value of Fairhaven into the late Mrs Pawson’s estate.

Who will this affect?

Owners of single holiday cottages, and possibly owners of several separate units. Those that run sites with more than one property are less likely to be bound by this ruling but HMRC may seek to extend the restriction of BPR further.

What action should be taken?

The ruling only affects the Inheritance Tax status of Holiday Cottages. Capital Gains Tax reliefs are still protected, but owners of properties should consider the following;

  1. Review wills to ensure assets not attracting BPR are dealt with promptly.
  2. Consider switching borrowings to Holiday Properties.
  3. Review ownership to see whether BPR can be secured in other ways.
  4. Keep detailed records of the work involved with running the holiday cottage.

Some owners with other trading businesses may be able to secure Inheritance Tax relief by transferring ownership to their trading business, obviously there will be Capital Gains Tax and particularly VAT implications of this.

For further information contact your usual Dodd & Co contact, Judith Clark, or Rob Hitch on 01228 530913.

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