Holiday-let Property Attracts Inheritance Tax
A recent decision of the Upper Tribunal (tax & Chancery Chamber) has clarified that generally holiday let properties held in a deceased’s estate will be subject to inheritance tax (HMRC –v- Pawson (deceased) [2013] UKUT 050 (TCC)).
Broadly, if an asset held in an estate is deemed to be ‘relevant business property’ then it will not fall subject to inheritance tax after death. However, if the business was mainly one of holding the property as an investment, then it would be subject to inheritance tax in the usual way (current standard rate of 40%).
Whether a business is mainly one of holding a property as an investment is a common area for litigation – as it was in this case – especially since HMRC changed its focus in these types of cases since 2008.
It is not difficult to see how a second home, for example, would lie squarely in the ‘investment’ category. Is a holiday let not different?
Having read the Judgment in this case, it appears to me that simply providing services that are additional or ancillary to the holiday let business will not be enough to prevent the business remaining mainly one of holding the property as an investment (and therefore subject to inheritance tax). In the context of a holiday let business, services such as cleaning, heating, maintenance and inspecting the property will likely be incidental to the business that is mainly investment in nature.
Owners of such assets who are conscious of estate planning should take note and act accordingly; perhaps by providing services that are of such nature and extent that they prevent the business from being one of mainly holding a property as an investment. However, it is difficult to see, in the normal case of a property letting business, whether that can be achieved in practice.
By Stephen Meade, Associate Solicitor at Richard Nelson LLP.
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