Taxman wins case over furnished holiday lets

Landlords of properties classed as furnished holiday lets are once again facing changes in tax treatment.

Their estates will now have to pay inheritance tax after a court ruled in HMRC’s favour.

A previous tribunal decision in the Pawson case confirmed that furnished holiday lets should not be considered an investment business for inheritance tax purposes.

This has now been overturned by a High Court judge sitting in the Upper Tier Tribunal. The taxman successfully argued that holiday lets should be categorised with other buy-to-let and rental property, so that it can charge inheritance tax on the owner’s death.

Stephen Barratt, private client director at accountants James Cowper, said: “It was accepted by all that the letting constituted a business. 

“The issue was whether or not it was ‘mainly’ an investment business. The judge agreed with HMRC that the activities of finding occupiers and maintaining the property outweighed the additional services and facilities. 

“The fact that the property was actively managed, as opposed to being passive, was not sufficient. Pawson’s estate had argued that by offering a cleaner, caretaker and gardener, they provided ‘services’ to holidaymakers, but once weighed in the balance these were held not to be enough.

“The previous ruling in the First Tier Tribunal surprised many, albeit pleasantly, because there was no clear evidence that the owner had provided significant additional services.

“In a sense we are back where we started with the same degree of uncertainty for those holiday let owners considering their IHT position. Relief from IHT remains theoretically possible but it will be difficult to achieve.”

Up until 2010/11, furnished holiday lettings were particularly attractive investments as they also allowed loss relief against other sources of income and gains, as well as qualifying for relief against inheritance tax. However, HMRC has been cracking the whip even before the latest case.

Reports suggest that the family in the Pawson case will go to the Court of Appeal. If so, they have only until the end of February.