Holiday lets need careful planning

Feb 7, 2014 | Uncategorized

Owners of rented holiday properties in Shropshire are not automatically entitled to tax relief following a ruling by a national tribunal.

Dyke Yaxley’s Agricultural Director, Mark Griffiths, said the decision followed the case of a family who claimed that holiday letting was a trade eligible for business relief and so should be free from inheritance tax.

“But after a lengthy investigation, the tribunal backed HM Revenue and Customs, and said the business should be considered to be making or holding investments.

“It now remains to be seen whether the family will appeal against the decision, and it’s a case that has created a great deal of interest across the UK.”

But Mark said there were alternative approaches to inheritance tax planning for furnished holiday letting properties which could be taken.

“If your holiday lets are on a farm, you could regard them as part of the total farm business.

“The farm accounts should include the holiday letting income, and a stronger case for this can certainly be made if one of the selling points of the properties is because they’re on a farm in the first place.

“If you take this route, HMRC have to consider the business as a whole – farming income and holiday lets combined – and then judge whether the activities are mainly the making or holding of investments. There is a downside to this approach though as you’ll need to include the holiday rental income in the VAT outputs.

“This means when compared to non VAT-registered neighbouring properties in the area, the rent will either be 20% greater or more likely, the unified business will have to suffer lower returns than a business below the VAT threshold.

“Alternatively you could transfer the holiday let property to another family member as a lifetime gift, making use of Capital Gains Tax hold-over relief and hope that the donor survives for seven years and so inheritance tax would be avoided.

“It’s clear that in a picturesque county like Shropshire, holiday lets can be very popular and indeed profitable, but you’ll need to take professional advice to ensure you meet the strict criteria if you want to benefit from the tax relief available.”

Mark Griffiths, Agricultural Director

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