Furnished Holiday Lettings and inheritance tax following the Pawson/Lockyer case

The Upper Tier Tribunal (UTT) ruling in HMRC’s favour in Revenue and Customs Commissioners (RCC) v Lockyer will have disappointed many owners of furnished holiday letting property who had hoped that business property relief (BPR) might apply to shield those properties from inheritance tax (IHT).

The Lockyer case does not entirely rule out BPR from applying to furnished holiday lettings but it restricts the range of cases to which the relief can apply. It is still possible to take BPR into account when planning for the succession of furnished holiday letting properties but the following key points must be borne in mind.

  • Furnished holiday lettings do not automatically qualify for BPR.
  • Normal maintenance work such as cleaning, maintenance, advertising and marketing does not count for much when deciding if the furnished holiday letting business qualifies for relief. BPR will depend more on services provided to the users of the property, rather than maintenance and management of the property.
  • BPR can only apply if there are enough added value services for it to be said that the business is preponderantly the provision of services and not simply making the premises available.

These points come out of the requirement to show that the lettings are not just a business but a business that goes beyond mainly owning and managing the property as an investment.

This case sits alongside HMRC’s known reluctance to allow BPR for caravan parks and serviced business accommodation unless significant additional services are provided. In the case of furnished holiday lettings, HMRC will now broadly expect the services offered to be similar to B&Bs or hotels where there is provision of catering, laundry and perhaps entertainment or amusement as well as the basic accommodation..

It follows that owners of holiday letting property might usefully consider what services they already provide and what others they could provide. The BPR rules are entirely different from the tests of furnished holiday letting for income tax, corporation tax and CGT, so property that doesn’t meet those taxes’ criteria as furnished holiday letting may still qualify for BPR in the right circumstances.

Anyone considering their potential IHT liability on holiday lettings needs to consider.

For further information contact Chris Williams