Family confronts substantial inheritance tax liability due to prevalent challenges in managing vacation rentals, potentially facing a £1 million cost.
In a heated legal battle, a family is facing an unenviable bill of a whopping £1.1 million in inheritance tax, having mistakenly believed they would be exempt. The dispute centers around the estate of Ms Gertrud Tanner, who passed away in 2017, leaving behind a holiday accommodation business with five properties near Whitby in North Yorkshire.
Initially, the executors of Tanner's will claimed business property relief (BPR) to avoid an inheritance tax bill. However, HMRC challenged the claim, arguing that the holiday lets were more an investment offering short-term rents than a proper business. In March, the First Tier Tribunal agreed, and the current inheritance tax bill due on the estate stands at £1,168,801.
The case is now up for appeal, but the situation highlights a common issue with furnished holiday lets, as many families inadvertently fall into the trap of unexpected inheritance tax bills due to misinterpreted rules. Phineas Hirsch, a partner at law firm Payne Hicks Beach, shared this insight, stating that cases like these have been recurring since 2013 when furnished holiday letting businesses were consistently denied BPR.
HMRC's view on BPR for holiday lets is that these businesses are usually investment activities, with the income mostly consisting of rent in return for property occupation. BPR is not applicable where the business consists primarily of making or holding investments. To qualify for BPR, there must be a genuine business - operating on commercial terms and not merely a hobby or side business - and the letting of the property needs to be "wholly or mainly trading," as opposed to being carried out for investment purposes.
To successfully claim BPR on furnished holiday lets, the wider package of services provided by the holiday letting enterprise needs to outweigh the provision of a place to stay. This could include providing a more hotel-like experience with meals, refreshments, daily cleaning services, or activities that form a primary reason to attract guests. However, the bar is set high, and many families find themselves falling short, as evidenced in the Tanner case.
The Tanner business offered full kitchen facilities, laundry facilities, heating, a telephone, books, DVDs, games rooms, gas, electricity, bed linen, towels, tea, coffee, milk, sugar, eggs, homemade scones, local newspapers, weather forecasts, tide timetables, tourism information, housekeeping, and cleaning services. Despite these offerings, HMRC and the First Tier Tribunal deemed the services insufficient to meet the high bar for BPR to apply to the inheritance tax bill.
The upcoming changes to business property relief from April 2026 may make the evaluation of applications even more stringent. This makes it crucial for those seeking to claim BPR to maintain clear and substantiated records of trading activities, demonstrating income attributed to trading activities linked to the additional services provided. Seeking professional legal, tax, and accounting advice is also recommended to ensure proper relief, understanding available relief, stringent requirements, and appropriate records in place to maximize the chances of qualifying.
- In light of the Tanner case, families planning to claim Business Property Relief (BPR) for their furnished holiday lets should consider offering a broader range of services beyond providing a place to stay, as the bar for qualification is set high.
- In order to successfully claim BPR and potentially reduce an inheritance tax bill, it's essential to maintain detailed records of trading activities, demonstrating income linked to the additional services provided, and seek professional legal, tax, and accounting advice to ensure compliance with stringent requirements.
