Avoiding inheritance tax on holiday lets

Those planning to make the most of their holiday lets should be aware that there are a number of ways to ensure that you're not unjustly taxed so that you can make the most of your property investment.

Before considering how to avoid unnecessary charges, it's first advisable to draw up a holiday letting agreement, which is a document utilised for a short-term lease of a furnished property.

The holiday letting agreement is valid for a range of property rentals on a short-term basis, including caravans, apartments, flats, houses and cottages, and should be used by anyone considering holiday letting.

One of the highlights of the agreement is that it is exempt from the Housing Act 1988, which means tenants are unable to secure tenure when the letting period comes to an end or if they breach the terms of the agreement.

The document is eligible for use in England, Wales and Scotland, so that property letting individuals can optimise the potential for profits on grounds in most parts of the UK.

Now, for those who want to ensure that their families don't pay inheritance tax on their holiday lets after death, a recent case highlighted the potential for this.

HM Revenue and Customs recently lost a court battle that brought to light the particulars of holiday letting and business property relief for inheritance tax.

Holiday let owners of properties in the UK and abroad could be able to reclaim tax deducted after the First-Tier Tax Tribunal ruled that holiday lets should be eligible for a tax inheritance exemption.

According to the tribunal, “an intelligent businessman would not consider them to be investments”, dismissing HMRC’s claim that holiday lets should be viewed in the same way as other buy-to-let and rental properties.

As such, inheritance tax cannot be applied to holiday lets after the owner’s death, regardless of how involved they were with holidaymakers.

Stephen Barratt, private client director for accountancy firm James Cowper, said: “The ruling has surprised many because there is no clear evidence that the owner was substantially involved with holidaymakers.

“The decision is good news and could open the door to a flood of claimants who have been awaiting the verdict.”

He added that it could also give people greater certainty in planning their affairs.

The expert highlighted that it was crucial to maintain proper records and file accounts with HMRC so that claiming business property relief is made easier, as well as protecting you against potential penalties.

Mr Barratt added: “Whilst the ruling does seem to set a low bar for claiming relief, those letting holiday accommodation should still look to satisfy HMRC’s more stringent tests wherever practical [in] case future developments go against taxpayers.”

He concluded by saying that anyone who believes they are entitled to relief should seek advice on the matter, which will ensure that the issue is dealt with in the most efficient way.

For further guidance on making the most on property lettings and rentals, consider downloading Lawpack’s guide entitled How To Avoid Landlord taxes 2011/12. ADNFCR-1645-ID-801312321-ADNFCR

Published on: March 7, 2012

Did you like this article? Share it!

Holiday Letting Agreement

Holiday let download advert
  • Solicitor approved
  • Expert guidance notes
  • Download now

Read More

How to Avoid Landlord Taxes 2015/16

Avoid landlord taxes guide advert

How to Avoid Landlord Taxes: over 100 property tax-saving tips and tax avoidance hints for landlords and investors.

Read More