Due to a widespread problem with vacation rentals, the family faces an inheritance tax bill of £1 million

According to attorneys, many grieving families who own furnished vacation rentals are no longer eligible for business property relief and must pay inheritance tax

After assuming they would owe nothing, a family is involved in a legal dispute with HMRC that could result in them having to pay an inheritance tax bill of 1 million.

Ms. Gertrud Tanner's estate, which passed away in 2017, is at issue. Her estate contained a vacation rental company consisting of five properties close to Whitby, North Yorkshire.

For IHT purposes, any ownership or share of a business is considered part of the estate. In order to avoid an inheritance tax bill, Tanner's executors filed for business property relief (BPR) after her death.

Business relief can be applied, uncapped, to either 50% or 100% of an estate's business assets that were passed down while the owner was still living or as part of a will. However, starting in April 2026, 100% relief will be capped at £1 million, and 50% relief will then apply.

The Tanners family believed that the furnished vacation rental business would be covered by BPR. HMRC, however, denied the assertion.

Because holiday rentals were more of a means of making an investment income from short-term rentals than a legitimate business, HMRC contended that it was ineligible. It was approved by the First Tier Tribunal in March.

The estate's inheritance tax bill was determined to be 1,168,801; however, the case is currently open for appeal.

According to attorneys, this is a common problem with furnished vacation rentals, and many grieving families violate the regulations, which results in them receiving unforeseen inheritance tax bills.

According to Phineas Hirsch, a partner at the legal firm Payne Hicks Beach, "The Tanner case is the latest in a lengthy string of cases dating back to 2013, wherein furnished vacation rental businesses were refused BPR.

This is because these businesses are considered investment businesses because the majority of their revenue is provided by rent for the use of real estate.

Due to HMRC's and the courts' consistent denial of claims, advisors have become more cautious in recent years when submitting BPR claims for furnished vacation rentals.

What is the position of HMRC regarding holiday rental business property relief?

According to HMRC, furnished vacation rentals will typically not be eligible for business property relief.

This is due to the fact that the majority of the revenue generated by these kinds of enterprises will be rent for the use of real estate.

According to Hirsch, BPR is not available in businesses that primarily or exclusively involve making or holding investments.

Starting with the premise that "the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activitywhere such an investment could be actively managed without losing its essential character as an investment," one can determine whether or not a business, like a holiday rental business, is eligible for relief.

"Basically, HMRC and the courts will deny IHT relief if the primary business is the provision of rental accommodation and the additional services are just a small part of that," Hirsch stated.

The reason why many families violate the regulations, however, is that HMRC acknowledges that there might be instances in which the furnished holiday rental establishment offers so many extra services that the activity qualifies as non-investment.

According to HMRC, each case must therefore be handled according to its unique facts.

Does a furnished vacation rental qualify for business property relief?

Mary Perham, a senior associate at the law firm Charles Russell Speechlys, claims that it is "notoriously difficult" to claim BPR for vacation rentals.

According to her, "in order to be eligible for BPR, there must be a legitimate business that operates on commercial terms and isn't just a hobby or side project, and that business of renting out the property must be "wholly or mainly trading" rather than being done for investment purposes and collecting short-term rents."

Hirsch stated that the larger range of services offered by the vacation rental company "must outweigh, possibly in both number and importance, the provision of a place to stay" in order to be eligible for business property relief on furnished vacation rentals.

Therefore, either offering meals and refreshments, daily cleaning services, or a more "hotel-like" experience. or more general pursuits like athletics or outdoor activities, which serve as the main driver of visitor attraction, could be beneficial," he said.

In order to be eligible for business relief, Tanner's family contended that her company had supplied the requisitely high level of additional services. However, the standard is extremely high.

The Tanner company had up to eight part-time workers, a full-time manager, and a number of staff members. The accommodations included a telephone that could take calls, a fully equipped kitchen, laundry facilities, and heating.

A few DVDs and books were available. The garage of one house had been partially transformed into a gaming area. Included were bed linens and towels, gas and electricity, and occasionally slippers and bathrobes.

A weekly weather forecast, a tide schedule, tea, coffee, milk and sugar, eggs, homemade scones with jam and butter, and the local newspaper were all provided at each property.

Information about tourism would be communicated orally, and brochures and pamphlets were supplied.

Housekeeping and cleaning services were provided by the company, mostly on changeover days, though customers could request additional cleaning services at an additional cost.

However, the First Tier Tribunal and HMRC both determined that this was insufficient to meet the high threshold needed for business property relief to be applied to the inheritance tax bill.

Partner Tom Hewitt of the law firm Burges Salmon has given some rather pessimistic advice.

While there may still be the occasional successful case where so many extra services are provided that a BPR claim is successful, he stated: "The sad advice is that no one should assume that relief will be available."

What effects will the modifications to business property relief have on vacation rentals?

The Labour government declared in the Autumn Budget of 2024 that the amount of 100% relief available for agricultural business property (APR) and BPR would be limited starting in April 2026.

Full relief would be available for assets eligible for 100 percent APR and 100 percent BPR up to a maximum of one million, after which the 50 percent relief would be applicable.

According to Perham of the legal firm Charles Russell Speechlys, this modification is probably going to result in BPR applications being examined and contested even more thoroughly.

Because of this, she said, it is essential that people who want to claim BPRwhether for vacation rentals or something elsekeep accurate and verified records of their trading activities.

"In the context of vacation rentals, this will involve proving revenue from trading activities connected to the extra services rendered," she stated.

"If business owners plan 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 maximize the chances of qualifying," Perham continued. "Business owners should be worried about tackling this alone."