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The real truth about tax on holiday cottages

Self catering holiday home market is a big deal

“Is the £100bn British holiday home market in danger of losing its shine?” asked The Sunday Times yesterday.  A great inflammatory headline for what is by no means a clear situation.  Holiday Cottage owners beware of just reading the headlines as always the detail is where the real information is.

There has been an ongoing court case between HMRC and a holiday cottage owner in Suffolk (Pawson) looking at whether a holiday cottage is an ‘investment’ or a ‘business’.

The tribunals that deal with cases between HMRC and taxpayers were recently asked to rule on whether the holiday cottage letting business was ‘mainly’ one of holding property as an investment, if so, no relief would be available for Inheritance Tax.   The tribunal reported that owning and holding property in order to obtain an income was generally to be characterised as an investment activity.  Taking active steps to find holidaymakers, making arrangements with them and collecting rent, maintaining the property and garden, and insuring the property, would all be activities which apply to a property held as an investment.

However, the provision of a cleaner/caretaker, hot water, heating, cleaning materials, a welcome pack, supplying bed linen would not apply to an investment activity.  The question is were they of such a nature and extent that they prevented the business from being mainly one of holding property as an investment?

The tribunal ruled that the ‘business’ was one of property letting, of a specialist nature, and that this particular Pawson case where they did not provide linen even though they had the benefit of a cleaner and caretaker was not enough to constitute a business.

The suggestion is that to qualify for beneficial tax reliefs, the provision of services must be a major part of any holiday cottage letting business.  Where the dividing line between ‘investment’ and ‘trading’ now falls is unclear and it is understood an appeal is to be lodged.

So holiday cottage owners out there don’t give up hope, continue to offer a good level of service and it may well be that your holiday cottage letting is still considered a ‘business’ and that the beneficial tax relief on Inheritance Tax will apply.

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