The families of holiday home owners across the Westcountry could be facing hefty inheritance tax bills following a landmark ruling.
Members of the Upper Tax Tribunal late last week released a judgment which said a test case bungalow qualified as an investment rather than a business.
Despite being an apparent technicality, the implications are wide-ranging as it means that, for the first time, people who want to pass on their holiday home businesses when they die will not qualify for relief from inheritance tax.
James Bailey, tax partner at Cornish accountants and advisers Robinson Reed Layton, said the eagerly anticipated ruling would have massive repercussions across the region.
“I think this is very bad news for people who own holiday cottages,” he said.
“We are not talking about holiday homes which are kept for your own enjoyment, but about the ones that are operated as a business and are let to people.
“There are thousands of people who own holiday homes like that in Devon and Cornwall.
“Virtually every farm in the region has a little holiday let on the side and these are all people who could potentially be affected by this ruling.”
About 60,000 people claim furnished holiday lettings status on their tax returns, generating taxable profits of £140 million at the last estimate in 2008.
The ruling last week surrounds the case of Nicolette Pawson, who owned a quarter share of a bungalow in Suffolk, with the rest owned by her family.
After she died in 2006, HM Revenue and Customs (HMRC) argued the house should be liable to inheritance tax as it was an investment, like owning an office block let out to a company, rather than a business, such as an hotel.
Mrs Pawson’s family took the case to appeal and won but HMRC upped the stakes and referred the matter to a more senior court.
High Court judges sitting in the tax chamber of the Upper Tribunal ruled that the Pawsons did not offer enough services for the “large bungalow” near Aldeburgh to qualify as a business, classing it instead as an investment.
This means that similar properties could now be liable for inheritance tax if the owners do not provide a certain – though unspecified – level of services to their guests.
Mr Bailey said the arguments in favour of holiday cottages being a business were cogent.
“They argued that if you were looking for an investment you would not look for something where you had to find a new tenant every week,” he said.
“Inheritance tax is set at 40 per cent, although £325,00 is tax-free. However in every case these days that tax-free amount is applied to the family home.”
A spokesman for HMRC said: “We are satisfied with the judgment, which confirms our interpretation of the law.”