Archives for June 2013

Married couples and registered civil partners are allowed to transfer assets to each other during their lifetime or when they die without incurring an Inheritance Tax charge. There is no limit to this relief as long as the receiving spouse or civil partner is UK domiciled.

This relief is known as the spouse or civil partner exemption.

Everyone’s estate is currently exempt from Inheritance Tax if valued, including gifts in the last seven years, at £325,000 or less – the so-called nil rate band. If the entire estate is passed to a surviving spouse or civil partner no Inheritance Tax would be payable due to the spouse or civil partner exemption, so for these couples the nil rate band used to be potentially wasted on the first death. To counter this, legislation was introduced that allowed the unused nil rate band on a first death to be passed, by claim, to the surviving spouse. This applies to second deaths on or after 9 October 2007.

Accordingly a surviving spouse or civil partner could have a nil rate band of up to £650,000 on their death.

This additional relief should be taken into account when you are planning your estate tax position. Evidence of the position from the first death should be retained.

Last year a case was heard before the First-tier Tribunal that found a Furnished Holiday Let (FHL) property should not be considered an investment for Business Property Relief (BPR) purposes. This was an important decision for owners of FHL businesses as it confirmed the availability of BPR for Inheritance Tax purposes. If the property in this case had been considered an investment property, BPR would have been denied.

HMRC appealed the First-tier ruling to the Upper Tribunal who have reversed the previous decision.

It would appear that FHL property owners again need to demonstrate that the nature of any additional services provided to persons letting their property are substantial and not merely incidental to the letting of the property. If the additional services are considered to be substantial then a BPR claim may succeed. Otherwise the letting activity will be treated as an investment and BPR will be denied.

In the light of the further ruling FHL property owners should re-examine their Inheritance Tax position. It is possible that an appeal will be made but until then this case remains the current authority.

For Income Tax purposes there is a clear definition of a FHL property. As long as your letting of a property falls within the following criteria it will be considered a FHL and treated as a trade or business.

The definition for Inheritance Tax BPR is again at odds with the Income Tax definition which merely considers periods of letting thus:

• The minimum period over which a qualifying property must be available for letting to the public in the relevant period is 210 days in a year.
• The minimum period over which a qualifying property is actually let to the public in the relevant period is 105 days in a year.
• The accommodation must not be let for periods of longer-term occupation for more than 155 days during a year.
• A “period of grace” allows FHL businesses that don’t continue to meet the “actually let” requirement for one or two years to elect to continue to qualify throughout that period.
• The property must be situated within the UK or EEA.