A family is embroiled in a legal battle with HMRC that could see them forced to pay an inheritance tax bill of £1.1 million after mistakenly believing they would owe nothing.
The dispute involves the estate of Ms Gertrud Tanner, who died in 2017. Her estate included a business which provided holiday accommodation, made up of five properties near Whitby in North Yorkshire.
Any ownership of a business, or share of a business, is included in the estate for IHT purposes. So after Tanner died, the executors of her will claimed business property relief (BPR) to avoid an inheritance tax bill.
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Business relief can apply, uncapped, to either 50% or 100% on an estate’s business assets, passed on while the owner is still alive or as part of the will – though this is changing from April 2026, when 100% relief will be capped at £1 million, and 50% relief will apply thereafter.
Tanner’s family thought BPR would apply to the furnished holiday letting business. However HMRC contested the claim.
HMRC argued it was ineligible on the grounds that the holiday lets were more a way to generate an investment income from short-term rents, rather than a proper business. In March, the First Tier Tribunal agreed.
The case is now open to appeal, but currently the inheritance tax bill due on the estate was held to be £1,168,801.
Lawyers say this is a widespread issue with furnished holiday lets and many bereaved families fall foul of the rules, landing them with unexpected inheritance tax bills.
Phineas Hirsch, a partner at law firm Payne Hicks Beach, said: “The Tanner case follows a long series of cases going back to 2013 in which furnished holiday letting businesses have been denied BPR.
“This is on the basis that the income derived from such businesses largely consists of rent in return for the occupation of property – and so they are treated as investment businesses.
“In recent years, advisors have been increasingly cautious about making BPR claims in respect of furnished holiday lets, because HMRC, and the courts, have been consistent in denying claims.”
What does HMRC say about business property relief for holiday lets?
HMRC’s view is that furnished holiday lets will in general not qualify for business property relief.
This is because the income derived from such businesses will largely consist of rent in return for the occupation of property.
Hirsch said: “BPR is not available where the business is one which consists wholly or mainly of making or holding investments. "
The starting point when considering whether or not a business such as a holiday letting business qualifies for relief is “that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity…[where] such an investment could be actively managed without losing its essential character as an investment”.
Basically, Hirsch said, if the primary business is the provision of rental accommodation and the additional services are just a small part of that, HMRC and the courts will deny IHT relief.
The reason many families fall foul of the rules, however, is that HMRC admits there may be cases where the level of additional services provided by the furnished holiday letting establishment is so high that the activity can be considered as non-investment.
As such, HMRC has said, each case needs to be treated on its own facts.
Can I claim business property relief on a furnished holiday let?
Claiming BPR for holiday lets is “notoriously difficult”, according to Mary Perham, senior associate at law firm Charles Russell Speechlys.
“To qualify for BPR, there must be a genuine business – as in operating on commercial terms and not merely a hobby or side hustle – and that business of letting the property must be “wholly or mainly trading”, as opposed to being carried out for investment purposes [collecting short-term rents],” she said.
To successfully claim business property relief on furnished holiday lets, Hirsch said the wider package of services provided by the holiday letting enterprise will “need to outweigh – possibly in both number and importance – the provision of a place to stay”.
“So either providing more of a 'hotel-like' experience – with provision of meals and refreshments, daily cleaning services, etc. – or wider activities such as sporting or outdoor activities which form a primary reason to attract guests, could help,” he said.
The family inheriting Tanner’s estate argued her business had provided the necessarily high level of extra services to qualify for business relief. But the bar is very high.
The Tanner business, which employed several staff, a full-time manager and up to eight part-time employees, had accommodation that included full kitchen facilities, laundry facilities, heating and a telephone that could receive incoming calls.
Some books and DVDs were provided. One property's garage had been partially converted into a games room. Gas and electricity, bed linen and towels, and in some cases bathrobes and slippers were also included.
Each property was provided with tea, coffee, milk and sugar, eggs, homemade scones with jam and butter, the local newspaper, a weekly weather forecast and a tide timetable.
Tourism information would be given verbally and tourist information brochures and leaflets were provided.
The business undertook housekeeping and cleaning services, primarily on changeover days, although additional cleaning services were provided at an extra charge when customers requested.
But HMRC and the First Tier Tribunal both decided this still wasn’t enough to meet the high bar required for business property relief to apply to the inheritance tax bill.
The guidance from Tom Hewitt, partner at law firm Burges Salmon, is pretty bleak.
He said: “Whilst there may still be the odd successful case where such a high level of additional services is offered that a BPR claim will be successful, the depressing advice is that no one should assume that relief will be available.”
How will the changes to business property relief affect holiday lets?
The Labour government announced in the 2024 Autumn Budget that, from April 2026, the availability of 100% relief for agricultural business property (APR) and BPR would be capped.
Assets eligible for 100% APR and assets eligible for 100% BPR would qualify for full relief up to a sum of £1 million, and the 50% relief would apply.
Perham from law firm Charles Russell Speechlys said this change is likely to mean applications for BPR will be even more closely reviewed and challenged.
This, she said, makes it crucial those seeking to claim BPR – whether for holiday lets or otherwise – are keeping clear and substantiated records of their trading activities.
“In the context of holiday lets, this will include being able to demonstrate income attributed to trading activities linked to the additional services provided,” she said.
Perham added: “Business owners should be wary about tackling this alone and if they intend to claim BPR they should seek professional legal, tax and accounting advice to ensure they understand the available relief, the stringent requirements and have appropriate records in place to maximise the chances of qualifying.”
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