Is Our Holiday Home Liable to UK Inheritance Tax?

I have been reading about the new enhanced allowances on main residences for inheritance tax purposes and was wondering if the same kind of relief was available for our holiday home?

Question asked by Thomas Samson

In short, no. The new main residence nil-rate band (MRNRB) does provide you with an expanded nil-rate band for your main residence providing you leave it to a qualifying direct descendant, but there’s no available relief on other residential property.

Inheritance Tax on UK and Overseas Properties

You haven’t said where your holiday home is, but assuming you’re a UK resident then it doesn’t matter whether the property is at home or abroad.

For a holiday home in the UK, you can sometimes choose which of your properties you wish to class as your main residence, but only one will count per couple or civil partnership. You’d most likely choose your main home, so you’d have to pay inheritance tax (IHT) on a holiday home.

UK residents must also pay IHT on all assets held worldwide. If you are a non-domicile the rules are different for overseas properties, but even non-domiciles must pay IHT on UK assets.

Furnished Holiday Lets and Inheritance Tax

You could perhaps rent out your holiday home and attempt to claim business property relief (BPR) on it, but this is a very contentious area and HMRC is scrutinising very closely any claims made for BPR on furnished holiday lets.

Based on current precedent, you are unlikely to be successful and your heirs will almost certainly be involved in some serious legal wrangling after your death if they want to get the decision to stand.

Heirs have appealed a number of cases to the Upper Tribunal in the past decade where they’ve been left an estate that includes a furnished holiday let which the deceased has attempted to claim BPR on, and the Upper Tribunal has often ruled in HMRC’s favour. This is because BPR cannot be claimed on a company “wholly or mainly” engaged in making or holding investments, which is what holiday letting is classed as.

Your heirs will have to prove that you offered “significant” levels of service in addition to just renting out the property, over and above general cleaning, maintenance, advertising and marketing.

Essentially, you’ll have to run your new holiday let like a hotel, providing services such as laundry, catering, entertainment and a high degree of interaction with your guests.

This would be costly, probably impractical and even then there would be no guarantee the HMRC will accept your application for BPR.

For most people, this is simply too large a risk to take and it can’t be recommended as a strategy.

I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.

Brendan Kelly
26/09/2019
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