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Good News for Owners of Holiday Lettings

The First Tier Tax Tribunal (FTTT) held, contrary to HMRC's current guidance, that a fairly typical holiday cottage letting qualified for business property relief (BPR) from inheritance tax. This is an important decision which, if upheld on appeal, will be very good news for owners of holiday cottage letting businesses. 

In  Pawson (deceased) v HMRC [2012] UKFTT 51 (TC), the late Mrs Pawson and her three children owned a bungalow in Suffolk which was rented out on short lets year after year to holidaymakers. On Mrs Pawson's death, a claim for BPR was made in respect of her quarter share. The business mostly made a modest profit. Family members stayed in the property for three weeks each year but paid an appropriate rent. 

The deceased had effectively run the business herself until about 2005, when her family became more involved. As a result the property was redecorated and they started advertising it on the internet. Basic services were provided: hot water was turned on before visitors arrived, the property was fully heated and the kitchen was kept fully equipped. A cleaner cleaned the property between lets and the garden was kept tidy. 

In deciding that the business did not consist wholly or mainly of holding investments, the FTTT looked very carefully at what services were offered. They took into account the family's efforts which included advertising, going to the cottage for emergencies and dealing with third parties. The FTTT concluded that significant services were provided (compared to a landlord of longer-term let properties) and it was these services which the customers paid for. The fact that the services could be provided at relatively low cost was irrelevant. The Tribunal also accepted evidence from an estate agent that the annual rent that the owners could have achieved by just renting the property out was considerably less than that they could make from letting it as a holiday cottage, his conclusion being that the difference in price was because of the services they provided. 

HMRC had been treating this case as a test case and this outcome is particularly advantageous for owners of holiday lets because if this business qualifies for BPR on its particular facts, then most other holiday lets should do as well - there was just one property, the services provided were arguably the bare minimum one would expect when renting a holiday cottage and it was not the most efficiently run or profitable business. However, the case is apparently going to appeal and so we will report again once the outcome of the appeal is known. 

Note, meanwhile that FHL owners who are less directly involved (e.g. who use agents to manage the lettings) may find it more difficult to establish that they are actively running a business, rather than owning an income-producing investment, in which case BPR may still be denied.

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