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Is your holiday let liable to inheritance tax?

One of the tax attractions of purchasing holiday letting cottages has traditionally been the expected availability of exemption from inheritance tax. This is on the basis that business property relief is obtained after two years of ownership, or possibly even without that qualifying period. Many owners have seen the purchase of a holiday let as a way of sheltering part of their estates from the ravages of the tax man so that the wealth can be passed on within their family. Alternatively, some properties which were intended to be used by the family become actively managed as holiday accommodation in order to try and obtain the relief and so pass the property on for the long term down the generations.

Whilst the position was never free from doubt, it was widely understood that an inheritance tax exemption was due prior to late 2008 when H M Revenue & Customs (HMRC) published a change in their view as to the availability of business property relief. HMRC then looked to confirm their new interpretation through the tax courts and have been successful at the second attempt in the case of Pawson. In this case, Justice Henderson in the Upper Tier Tribunal (the old High Court) found in favour of HMRC and made some fairly sweeping comments which are currently being used to justify the denial of business property relief on almost all holiday accommodation as far as HMRC are concerned.

At the moment it looks unlikely that there will be an appeal in the Pawson case and I am advising property owners to plan on the basis that there would be no such appeal. So where does that leave them?

First, it is important to understand that the Pawson decision has its limitations and the interpretation of HMRC should not be accepted without first seeking professional advice from someone familiar with this area of tax law. The lead case remains that of George which is a Court of Appeal decision and therefore takes precedence over the Upper Tier tribunal decision. There are areas where George would appear to conflict with Pawson and in such circumstances George takes priority. Further, in the recent First Tier tribunal of Zetland, the comments of Justice Henderson in Pawson were analysed and were not accepted without limitation. For good or ill, there is plenty of work for accountants, solicitors and barristers in this area yet!

Then there is the issue as to what property owners can do to improve their chances of qualification for business property relief. Where there are multiple properties on one site and active participation of the owners/management then qualification for business property relief still appears possible. For most this will still require changes in the way that they operate and in the detail of the services provided to the holiday property occupier. Discussions on this issue need to take place at a very detailed level and it will focus in particular on:

  • Provision of facilities such as games rooms, swimming pools and tennis courts;
  • Whether welcome packs or other food are provided to the occupiers and how this is done;
  • Cleaning and refuse collection arrangements; and
  • The provision of linen and laundry arrangements.


It is possible to establish whether a business should qualify for business property relief in these circumstances and to be able to resist the demands of HMRC but it is quite a detailed exercise and currently there is no shortcut or assumptions that can be made. It is necessary to go through the detailed process set out in the George case to support any claim for business property relief.

But what of single properties, particularly those let through letting agents?

For these, the likelihood of qualification for business property relief looks very slim indeed and the default assumption of owners should be that a property will not qualify. For many of these it may not be advisable to incur significant fees for professional advice in terms of trying to achieve qualification as the chances of success are probably too low to make the expense worthwhile. Instead, other tax planning actions should be considered.

Even if a furnished holiday letting property does not qualify for business property relief then it still qualifies for favourable capital gains tax reliefs as long as it meets the qualifying criteria for furnished holiday letting in the income tax legislation. This means that such properties can qualify as business assets and so be transferred to the next generation without a capital gains tax liability which is considerably better than the position for a property let on an assured short hold tenancy. Therefore there is an effective strategy for passing on such properties to the next generation – either in whole or in part.

For properties that are primarily intended as family holiday homes then it would be unwise to assume entitlement to business property relief at all, especially given the decision in the recent Ramsay case on the meaning of a business. Such properties have even more of an uphill challenge than properties purchased primarily for letting. Where the intention is to keep these in the family long term, then there are considerable advantages to using a trust structure long term both for tax reasons and to try and avoid fragmented ownership amongst siblings or cousins. Whilst there are a number of taxes to be considered in such planning, these arrangements are fairly straightforward and can give the family certainty for the future. Given that the values of many coastal properties have fallen in recent years, it is currently a good time to consider such trust arrangements.

Unsurprisingly, I would advise property owners concerned about inheritance tax to take good professional advice from an expert in this field. 





John Endacott

John Endacott is a tax partner in Francis Clark LLP following the merger of Winter Rule with Francis Clark.

He can be contacted on:

01872 246586