Furnished Holiday Lets and Inheritance Tax
14 March 2018
A furnished holiday let (FHL) is the provision of furnished accommodation for short term lets (less than 31 consecutive days per tenant) on a commercial basis, with a view to making a profit.
There are also a number of other criteria with regards to the number of days the property must be available and actually let during a tax year.
FHL businesses could be in the form of completely separate dwellings away from where you live, they could be an annexe to your home, and can also extend to farmers that have decided to diversify from agriculture by the conversion of redundant outbuildings for the use of holiday accommodation, for example.
Landlords generally provide services to tenants of varying levels on their fully furnished accommodation.
Income tax (IT) and capital gains tax (CGT) advantages can be secured providing the provision of the accommodation meets the statutory criteria. This is because FHLs, for IT and CGT purposes, are considered a commercial trade/business.
However, the situation is not clear-cut for Inheritance Tax (IHT) purposes, with recent cases ruling that FHLs are investments in respect of this area of taxation, as opposed to a business, the view of which is thoroughly supported by HM Revenue and Customs (HMRC). Unfortunately, this potentially prevents the application of Business Property Relief (BPR), which would see 100% of the business value relieved for the purposes of IHT, where a business is “wholly or mainly trading”.
This is a disappointing result for FHL business owners, as IHT charged on the value of an estate is 40% (after the nil rate band of £325,000 and available reliefs are accounted for). With no BPR available on FHL businesses, the estate will have a significant increase in IHT due, which may not have previously been considered.
All is not lost, however, as in terms of deciding whether an FHL business qualifies for BPR, there is no general approach. All the facts must be considered on a case by case basis, analysing the business’ activities as well as considering the intentions and actions of the landowner themselves. Should the facts not appear to be in favour considering the most recent case law, IHT planning can be undertaken with reference to the FHL position, as well as to reduce overall liability to IHT.
Please do get in touch if you would like to more information on IHT in respect of FHL, or in general.