More than 100,000 holiday home owners picked up an inheritance tax shock after the High Court ruled that a bungalow rented out to holidaymakers was an investment, not a business.
HM Revenue and Customs challenged whether the property near Aldeburgh, Suffolk, was a business because of their interpretation of tax rules.
HMRC revised the rules on what constitutes a business in 2008. Since then, the tax man has insisted a furnished property to let must offer other services to be considered as a business.
The result of the rule change meant that the owners of a holiday home would be liable to pay death duty on the property at 40% if they have an estate valued at over £325,000.
Previously, a property let for holidays was regarded as a business and was exempt from inheritance tax.
Family to appeal
HMRC had already lost their argument for the bungalow in the Lower Tribunal, which agreed with the Lawson estate, which owns the property, that it should be considered to be a business.
However, an appeal to the Upper Tribunal before High Court judges, saw the original ruling overturned.
The family concerned say they will appeal the decision.
Their property was owned by Nicolette Pawson, who died in 2006, with her son and two daughters.
The family argued that their holiday let was a business since they provided extra services which included a cleaner, gardener and a caretaker. They also had the bed linen cleaned with a paid laundry service.
In their rules, HMRC says that provision of a laundry and cleaning service is part of a business but there needs to be more such as the ability to organise car hire or booking restaurants, providing food for the fridge and the provision of a games room.
Holiday let is not a business
Without these a property is simply holiday accommodation and not a business.
After the case, Mrs Pawson’s son Nicholas said: “We’ve worked hard at making this letting business a success. It’s no longer that easy – you can’t just place a magazine advert, you really have to work hard.”
HMRC said it was ‘satisfied’ with the judgement as it confirms how they should interpret the holiday home law.
John Endacott, an accountant at Francis Clark which specialises in holiday home lettings, said the court’s ruling was a ‘bad decision’ which could concern 100,000 of the UK’s owners of holiday home.
He added that the interpretation being looked at by HMRC is the extent to which holiday home owners interact with their guests which would define whether it was a business or just accommodation.