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Holiday home owners hit in tax double whammy
Holiday letting businesses have been hit by a change in tax relief and the successful overturning of a court ruling by HMRC.
Thousands of landlords with holiday lettings could face increased inheritance tax (IHT) bills after a court ruling was overturned.
Those with holiday lettings have been left disappointed by the latest instalment in the Nicolette Pawson case. In 2011 a tribunal decision ruled in favour of Pawson that furnished holiday lets should not be considered an investment or business for inheritance tax purposes.
The ruling allowed holiday lets to claim business property relief (BPR) when only minimal services were provided to the holidaymakers. A business that can claim BPR is also exempt from IHT on the owner’s death.
However, the decision has now been overturned by a High Court judge after HMRC appealed the original decision.
The judge concluded that the relief would only be available if the servicing of the letting, and those which were provided to the holidaymaker, were more significant than the use of the land.
His view was that even an actively-managed property let would be considered an investment business which does not qualify for BPR.
This now means that thousands of people who own holiday lets could see the value of their estate increase and pushed over the £325,000 individual threshold for IHT, after which assets are subject to a 40% tax.
Attempts are now being made by holiday let owners to create a fighting fund to take the case to the Court of Appeal.
The legal challenge is not the only hurdle being faced by holiday let landlords, HMRC has also made changes relating to tax reliefs and losses.
Up to 2010/11 relief for losses in a furnished holiday let could not only be claimed against the subsequent profits from the same business but against general income for the year of the loss and/or the immediately preceding year, against capital gains and as terminal loss relief when the holiday let business ended, with the losses carried back and set off against earlier years’ profits.
However, from 2011/12 relief for losses from holiday lets could only be carried forward against the profits arising from the same business in future years, making the reliefs far less generous.
George Bull, senior tax partner at accountants Baker Tilly, said the on-going court battle was a ‘major worry’ for holiday home investors.
‘At a time when more Britons are taking holidays in the UK, it is very unsatisfactory that the tax position of furnished holiday lettings keeps changing,’ he said.
‘Many people who buy property as furnished holiday lettings do so once the children have left home, with an eye to supplementing post-retirement income in a way that does not attract IHT on death. Having incurred all the costs and stamp duty of buying a property and running it, owners will not want to change their investment position quickly.
‘For them, these tax changes are a major worry. Owners of furnished holiday lettings should now be considering what is best for them in their own specific circumstances.’
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