Business property relief (BPR) can potentially save IHT relief at 40% so an individual with business assets worth £1m could save tax of £400,000 by ensuring that BPR is available.
However, not all holiday lettings businesses qualify for this valuable tax break. One of the main tests to obtain BPR is that the owner must be conducting a business which is not primarily an investment business. Therefore, a holiday owner has to provide some ancillary services to clients rather than merely the accommodation.
A recent court case considered the distinction between a property used for a qualifying business and a property held as an investment. In the Nicollette Pawson (deceased) v HMRC case, the taxpayer successfully argued that the holiday accommodation did qualify for BPR. The tribunal was convinced that the need to constantly find new occupants, and the fact that additional services were provided over and above the bare upkeep of the property, meant that the property in question was a business asset and definitely not an investment.
As with many court cases the decision turned on its facts but this is a very useful ruling for owners of furnished holiday accommodation. At the time of writing HMRC has not appealed. The key point is to ensure that additional services are being provided compared to an ordinary property letting, but those additional services following this case may not need to be onerous. For example, the additional services in the Pawson case included the fact that the property was cleaned between lettings, it was heated and hot water was turned on before guests arrived. In addition it was fully furnished and the kitchen was fully equipped and these services were provided for each letting. These services are fairly typical and it is welcome news that these are less than HMRC's view, which would require the owner to be much more hands on with their guests.
Owners of holiday lets should be aware that there are a number of other requirements to ensure BPR is available and professional advice should be sought as it is important to have all the necessary conditions in place to protect the potentially substantial IHT savings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
