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Relief for holiday let owners as HMRC loses key inheritance tax case

3 March 2012

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Holiday let owners across the country are in line for a tax windfall after a court decision that allows them to claim Business Property Relief (BPR) for inheritance tax (IHT).

BPR can avoid IHT on the full value of a holiday let asset transferred on the owner’s death and whilst the ruling concerned a UK property, it could also have consequences for people who let out their property abroad.

Saying that “an intelligent businessman would not consider them to be investments”, the First-Tier Tax Tribunal dismissed HMRC’s argument that furnished holiday lets should not be considered a business for IHT purposes.

The taxman had sought to categorise the holiday let with other buy to let and rental property, and to charge IHT on the owner’s death accordingly. Their own guidance states that relief is only to be given where the owner was substantially involved with holidaymakers but this was not accepted.

Stephen Barratt, private client director at accountants James Cowper Kreston comments: “This ruling has surprised many because there is no clear evidence that the owner was substantially involved with the holidaymakers thus casting doubt on HMRC’s own guidance. While HMRC can be expected to take their arguments to the Upper Tier Tribunal, as it stands, however, the decision is good news and could open the door to a flood of claimants who have been awaiting the verdict. It could also give people greater certainty in planning their affairs.”

Stephen Barratt continues: “Those with overseas property that they let out such as a villa in Spain could also find that they will be able to make a BPR claim as well. Maintaining proper records and filing accounts with HMRC will be important in preparing the way for a claim to relief, as well as to avoid penalties following the initiative started at the end of last year which has seen inspectors starting to clamp down on unpaid tax on overseas properties.”

However Stephen does add a note of caution. “Whilst the ruling does seem to set a low bar for claiming relief, those letting holiday accommodation should still look to satisfy HMRC’s more stringent tests wherever practical on case future developments go against taxpayers.

“If an owner believes they may benefit from the implications of the decision, professional guidance should be sought so that matters are planned and dealt with in the best possible way.”

Stephen Barratt, Director, James Cowper Kreston LLP, Tel +44 (0)1635 35255 or email sbarratt@jamescowper.co.uk