Will your holiday home be exempt from inheritance tax?

If you own a holiday home and let it, furnished, for at least 105 days a year on a commercial basis, and so long as it’s available for letting for 210 days a year then, subject to one or two other qualifying conditions, there’s a good chance that you’re running a furnished holiday lettings (FHL) business. You should be declaring the profits from your FHL business to HMRC on your tax return.

Business assets can, subject to certain conditions, qualify for something called business property relief (BPR) for inheritance tax (IHT) purposes. In some cases, BPR is given at 100% which means that the whole value of the asset is effectively left out of the value of the deceased’s estate when calculating IHT.

An asset doesn’t qualify for BPR if it is ‘wholly or mainly’ used for ‘making or holding investments’. It’s for this reason that a normal residential property (e.g. buy to let) doesn’t qualify. The crux of the matter with a FHL is whether the property is there ‘mainly’ as an investment – the hope being that it will increase in value – with any rental income essentially only a side issue.

If you imagine a retailer buying a shop to run his business from, the ‘main’ purpose of buying the premises is probably going to be to provide somewhere from which the trade can operate, so BPR would apply in this case.

As a FHL owner, if you want to stand a chance of BPR applying then it’s important to think along the same lines as the retailer. Think about adding services that will turn you from being a pure landlord into a trader. Offer things like food and/or catering, a games room, excursions and taxi services as part of the holiday ‘package’ and you’ll stand a much greater chance of the property qualifying for BPR. With IHT at 40% and assuming a property worth £500k, you’ll be saving the kids £200k of IHT – not an amount to be sneered at!

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David Elliott
David Elliott

Chartered Accountant, BSC, FCA

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