Holiday lets and tax relief
Trading businesses get relief from inheritance tax; investment businesses do not.
A hotel is a trading business – even Basil Fawlty would accept that! A house let to tenants is an investment. Somewhere on the dividing line between trading and investing are caravan parks (a past battleground with the Revenue) and now holiday cottages.
What are the tests that decide which side of the line you fall? With caravan parks, taxpayers argue that the business is more than just hiring out caravans. They provide many other facilities and services – for instance, an on-site shop and cleaning.
HMRC argue that the business is mainly investment-based. Any services are incidental to the main activity of letting caravans and there are a number of leading cases.
Recently, HMRC have focussed on holiday cottages. Holiday lets face two hurdles: firstly, they should represent a genuine business activity carried on for a profit; and secondly they should be not be investment focussed.
In the case of Pawson, published recently, the deceased owned a quarter share of a single holiday cottage in Thorpeness. The cottage was let out during the holiday season except for three weeks when it was used by the owners and their families. In spite of modest profits for two years and a loss in the third year, the Tribunal agreed with the taxpayer that the holiday letting was a genuine business carried out for commercial gain. The taxpayer had cleared the first hurdle.
In respect of the second hurdle, the Tribunal decided that the services provided (a cleaner and a gardener between lettings, a telephone and a television) were a ‘significant part of the reason why the occupiers are prepared to pay what they do pay for a package of benefits they receive when they book to use the property as a holiday destination’ and therefore such services were more than just incidental to the holding of the cottage as an investment.
Therefore, relief was granted.
If you have a holiday let, whether in the UK or overseas, you should review the way in which you run this to ensure it qualifies for relief. Services have to be provided consistently to satisfy the conditions, so do not leave this until the last minute.
Consider internet facility, make sure you let to strangers and not just family and friends, offer a meet & greet service, if you stay at the property yourself then pay some rent.
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