Owners of furnished holiday lets have been dealt a tax blow by the recent High Court decision in the estate of Pawson which was heard in December 2012.
Business or investment?
It used to be the case that a furnished holiday home qualified for Inheritance Tax (IHT) relief as it was deemed to be a 'business', rather than an 'investment'. If the holiday home was deemed a business, the relief reduced the value of the 'business' to nil and as such no IHT was payable on the death of the owner. By contrast, an 'investment' enjoyed no relief from IHT.
In 2008 HM Revenue & Customs changed their view of furnished holiday lets and confirmed that in order to qualify for IHT relief, 'services' must be offered in addition to the provision of accommodation.
Background to the Pawson case
Nicolette Pawson owned a furnished holiday let with her three children. On Nicolette's death, her executors claimed IHT relief on the basis that the holiday let was a 'business'. They employed a cleaner, caretaker and gardener and paid for a laundry service. They claimed these were 'services' entitling them to claim the relief.
HMRC disagreed and took the case to the Lower Tribunal who found in favour of the Pawson estate in 2011; however HMRC took the case to the High Court and persuaded the judges to overturn the decision of the Lower Tribunal.
'This decision has wide implications for owners of furnished holiday lets who were hoping that IHT relief could be claimed on their deaths' comments Steven Appleton, an Associate in DWF's Leeds office. 'It is now essential that the owners of these holiday lets take advice on whether IHT relief can be claimed and whether any adjustments need to be made to the way in which the business is operated, to maximise the chances of the relief operating'.
Providing evidence of a business
This is a complex area, made all the more difficult by the Pawson case, however the things owners have historically done to demonstrate their holiday let is a 'business' rather than an 'investment' include:
- Cleaning and laundry services
- Provision of laundry (ie bedding, towels etc)
- Organising car hire and booking restaurants
- Provision of food
- Providing swimming pools and games rooms.
According to Steven, 'the more evidence there is that the holiday let is a genuine business, the better. Anything that demonstrates a holiday rather than just accommodation is being provided can only assist a claim. Owners might consider providing newspaper delivery, access to a local sports club or provision of a landline for the use of guests.'
'Each case will be assessed on its merits, however HMRC will now feel empowered to reject more claims for IHT relief on holiday lets and being able to demonstrate the operation of a business is consequently much more important'.