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Holiday lets court ruling has inheritance-tax implications
A COURT ruling has seen furnished holiday lets reclassified as business investments in a move that will alter inheritance tax plans for property owners across the country.
A York accountant is raising awareness of the ruling which she says will have “significant ramifications” across North Yorkshire in an area rich in holiday lets.
Until recently, furnished holiday lets enjoyed inheritance tax business property relief, which covered 100 per cent of the property’s value, and as such formed a key part in inheritance planning.
However, that relief has been thrown out following the upper-tier tax tribunal decision of HMRC v Pawson.
Louise Battison, a tax adviser at JWP Creers, which has an office at York Science Park and another at Selby, said: “The tribunal decided that, despite evidence of Mrs Pawson’s involvement in the management and maintenance of the properties, and the generation of rental income, such properties are investment businesses and, in accordance with the Inheritance Tax Act 1984, no relief should be allowed against their value.
“A key element of the ruling was that the level and type of services offered by Mrs Pawson was not considered great enough for her furnished holiday-let business to be regarded as anything other than an investment vehicle.
“The ruling now means that where once a £350,000 barn conversion let to holidaymakers could have potentially avoided inheritance tax, the same owner could now be liable to a potential inheritance tax charge of £140,000 on the same asset.”
HMRC has refused a right to appeal, on a technicality, and Ms Battison says the judgment will stand, affecting thousands of furnished holiday-let properties until a case with different circumstances comes before the courts.
Ms Battison added: “This ruling is unlikely to be the last word on this issue. In another unrelated recent case, where the owner was clearly able to demonstrate 20 hours a week of hard work in connection with a property let, the judge allowed relief against capital gains tax and said the guidelines would apply for all taxes including business property relief.
“Our advice is that all investors who currently own, or who are thinking of investing, in furnished holiday let properties, should keep a clear and comprehensive record of all the additional services they provide, such as cleaning, laundry, gardening and maintenance and the regular hours this involves so a case can be made to structure their arrangements as tax- efficiently as possible.”
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