Ruling sparks holiday cottages warning

Farmers who let holiday cottages in Yorkshire are being advised to seek professional advice on Inheritance Tax implications following a landmark legal ruling.

A High Court judge upheld a claim by HM Revenue and Customs (HMRC) that furnished holiday lets are “an investment” rather than “a business” and as such are subject to 40 per cent death duty on estates worth more than £325,000.

A previous tribunal decision in the case of the Pawson family in Suffolk had confirmed that furnished holiday lets should not be considered an investment business. The ruling was subsequently overturned after HMRC successfully argued that holiday lets should be categorised with other buy-to-let and rental property, so that it can charge Inheritance Tax on the owner’s death.

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Property consultants Carter Jonas warn that the ruling could have significant implications.

Dan Taylor, Carter Jonas’ York-based rural expert, said: “Up to 2010/11, furnished holiday lettings were particularly attractive investments as they also allowed loss relief against other sources of income and gains, as well as qualifying for relief against Inheritance Tax. But HMRC was cracking the whip even before the latest case so landlords would be well-advised to seek clarity.”

Holiday lettings were regarded as businesses, exempt from the tax but after a review in 2008, the Revenue altered its interpretation of the law, insisting that furnished property lets must offer services to qualify as businesses. In the Pawsons’ case, employing a cleaner, caretaker and gardener and paying for a laundry service was not considered sufficient.