Tax blow for holiday lets

    Owners of property rented out as holiday lets face big chances to their Inheritance Tax liabilities following the decision of the Upper Tribunal (Tax and Chancery Chamber) in the Pawson case, announced on 31 January.

    The decision, resulting from an appeal by HM Revenue & Customs, effectively means that the vast majority of holiday lets are no longer eligible for business property relief from Inheritance Tax. The taxpayer has yet to confirm whether or not he will lodge a further appeal against the decision.

    The Pawson decision will have a particularly heavy impact on the South West, given the number of holiday lets in the region. However, it is important to remember that holiday lets are still treated as a trade for Income Tax purposes; the Pawson decision relates specifically to relief from Inheritance Tax.

    The Pawson case involved a single Suffolk holiday let; the Tribunal decided that the level of services provided to holiday makers by the owner was not sufficient to take it out of the category of an investment. Holiday lets which form part of a bigger business, such as those on farms, should still be able to obtain business property relief as long as the preponderance of activity on the farm can be classed as trading rather than investment — which will usually be the case.

    This is yet another example of the hardening attitude of HMRC, particularly in relation to IHT reliefs. It reinforces the need for good advice at the earliest stages of IHT planning.

     
     

    Key contacts

    Mike Townsend FRICS MCIArb TEP

    Mike Townsend FRICS MCIArb TEP

    Director
    Savills Exeter

    Savills Exeter

    +44 (0) 1392 455 708

    +44 (0) 1392 455 708