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40% Tax Shock For Holiday Home Investors

Inheritance TaxMy friend Cliff, who owns a holiday home in Devon, told me some bad news he had heard this week about the way UK holiday homes are taxed.

Cliff is in his early 50s and bought his house with a sea view 15 years ago thinking it would provide an ideal nest egg and when he’s gone, something for his two children to inherit. Now Cliff isn’t happy because he has found out that the inheritance tax relief he thought he was getting has now been taken away.

This means that there will be a 40% inheritance tax bill for his children to pay when he dies. He is not alone, according to the Financial Times, there are another 65,000 holiday home owners facing the same prospect.

Mr Taxman has been pursuing this tax loop hole for some time and it now looks like they have won their battle to make those who inherit holiday homes pay 40% tax. The inheritance tax threshold is currently £325,000 which is expected remain in place until at least 2015.

The change in tax rules happened after a tribunal ruling last year, which did find in favour of holiday home owners. This would have meant that Cliff’s home would have qualified for business property relief and he could have avoided paying inheritance tax altogether.

Unfortunately, this ruling has been overturned on appeal. In the HMRC v Pawson case, it was found that the owner did not have ‘substantial involvement’ in the property or enough that would make it appear like a business.

So the conclusion to all this is, if my friend is unable to prove that he has used the property for business purposes, for example has he provided a holiday experience for his guests rather than just some accommodation, he will not be able to avoid the tax.

So what does all this mean for investors in overseas property?

There are some countries where inheritance tax has been abolished, however if you happen to own a property in those countries and are classed as living in the UK, then the 40% inheritance tax would still apply.

The situation is more complicated in countries that do have their own inheritance tax, like Turkey for example. If you own a holiday home in Turkey then you may choose to pay their inheritance tax where the maximum is 30%, though it will be useful to seek advice from Turkish property tax experts to avoid any headaches for your loved ones.

One glimmer of hope on the horizon is that there may well be another change in the rules when the issue is taken to the Court of Appeal. This will aim to establish a set of guidelines that say what does and does not qualify as a business property.

What are your thoughts on the decision to make UK holiday let owners liable for inheritance tax? Please leave your responses below:

Kind regards

Brett Tudor
Property Expert

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