Will your holiday let give you an Inheritance Tax headache?

Many holiday property owners put a lot of time and effort into making their properties attractive for letting and often it can seem like a full-time job, especially if you do not engage a specialist letting agent to help you with bookings & management.

We see a variety of clients who often go this extra mile in order to establish the “business identity” of the let property, in the mistaken belief that such involvement will attract “Business Property Relief” (BPR) at 100% & therefore exempt the value of the property from Inheritance Tax (IHT) on the owner’s death.

Yet another recently reported case (Executors of Marjorie Ross v HMRC) from the First Tier Tax Tribunal once again highlights the almost impossible barriers for holiday property owners to obtain relief from IHT – even where “additional services” were provided – these included: On-site caretaker & handyman, meals at an adjacent hotel, loan of surfboards & kayaks, BBQ equipment & regular bed-linen changes plus a personal welcome (on a Friday only) from the owner.

All these “additional services” were intended to broaden the “holiday experience” & hopefully strengthen the case to obtain IHT relief on both the let property but also the business generally.

Regrettably, HMRC were having none of this – which wasn’t surprising as the potential IHT saving would have run to a six-figure amount. They did however make some interesting comments when arguing about why the relief should be denied – including:

  1. Despite an elevated level of “active management” – it is unlikely that a holiday property will lose its “essential character as an investment” (& as a result be denied BPR)
  2. HMRC will always regard as “unlikely to be sufficiently material” any non-investment linked services – so all the greeting of clients on a Friday & provision of meals will sadly not enhance your position for IHT purposes
  3. Any ancillary services provided (in this case the meals prepared at a nearby hotel) by a third party “are not a relevant element” in making the analysis that the holiday let was a bona-fide business rather than the holding of property for investment.

Not unsurprisingly the case was thrown out & the valuable IHT relief under IHTA 1984, s105 was denied.

So where does this case leave the many holiday property owners who do not wish to attract IHT on their estates?

Well they might wish to consider some form of co-ownership of the property with other family members and/or a family trust. In doing so they can fragment the underlying property valuation & reduce potential IHT liabilities significantly.

A recent example we have helped a client with, involved a husband & wife gifting their holiday let property onto Discretionary Trusts for the longer term benefit of their children, grandchildren & great grandchildren.

Care needs to be taken in terms of the actual valuation of the property (current IHT limit could cap this at £662k in this example) concerned & who you appoint as Trustees; but IHT & Income Tax savings can be achieved if you structure the trust properly.

Also, any incidental use of the property by family members needs careful consideration if you are to avoid unravelling the potential IHT savings.

Sadly, following the recent Marjorie Ross case there would appear to be very little point in going the extra mile to provide all your customers with a holiday experience & run the property in an efficient business manner if HMRC are just going to say you will be denied IHT reliefs which are only to be given to hoteliers or holiday camp (think log cabins) proprietors. A sad state of affairs when you consider the extensive time commitment many owners make to their holiday letting businesses.

For more information, please get in touch: hello@garbutt-elliott.co.uk – 01904 464 100