Furnished Holiday Lets – The saga continues ……
The past couple of years have seen changes to the previously favourable tax treatment of Furnished Holiday Lets (FHLs). These include changes to the qualifying conditions and the denial of sideways income tax loss relief (the effects of these have been discussed in previous blogs and articles on our website.Click here to view previous blogs).
There has now been a development relating to Inheritance Tax (IHT) which is potentially even more disturbing.
Just before Christmas 2012 the upper tier tax tribunal (UTT) heard the appeal in the case of Pawson. The issue at point is whether business property relief (BPR) is due on holiday lets. If BPR applies then the relief effectively takes the value of the property out of the death estate potentially saving 40%.
The facts were that Mrs Pawson owned a share in a holiday letting cottage known Fairhaven on the Suffolk coast. This was let as a holiday property with short term lets lasting from a few days to two weeks. The income and profits were very low in earlier tax years but after some increasing involvement from some of the other co-owners, the income and profits were substantially increased by the time of Mrs Pawson’s death. In 2006/07 the income was £16,590 and the profits were £4,450.
A cleaner was employed to deal with cleaning between lets, a gardener tended the garden and the co-owners were available to deal with any issues arising (even though they lived some hundreds of miles away). Television, telephone and utilities were all provided, as was a fully equipped kitchen. A laundry service for linen started only after Mrs Pawson’s death. A commercial insurance policy was held on the property.
HMRC challenged the claim for BPR made by the executors of Mrs Pawson’s estate claiming that instead of Fairhaven being a business property it was in fact merely an investment property which would effectively make its value subject to IHT.
In early 2012 the first tier tribunal (FTT) ruled that BPR should apply stating that an ‘intelligent businessman’ would not have considered Fairhaven to be an investment.
The UTT decision in the Pawson case was released on 31 January. They reversed the decision of the FTT and found in favour of HMRC.
The judge ruled that the level of services was not sufficient to take it out of the category of an investment. He also made some more worrying comments which suggest that a holiday property would never qualify, irrespective of the level of services provided.
A decision about an appeal is pending, so there may not be certainty over the IHT treatment for some time.
However, the best advice is that if you are planning to claim BPR in the future on an FHL then you need to take steps to maximise your chances of success.
Reviewing the level of services provided as well as considering registering as self employed would be good starting points.