A High Court ruling designating holiday lettings as  investment property and not a business

– could affect inheritance tax for 100,000 owners.

In the case, HM Revenue and Customs challenged whether a bungalow, near Aldeburgh, Suffolk, was classed as a business because of how tax rules are interpreted.

The laws about what constitutes a business were altered by HMRC in 2008, meaning that furnished holiday lettings are  not considered a business unless other services are offered.

This results in holiday lettings owners becoming liable to pay death duty on their property at 40% if the estate is valued at more than £325,000.

Before the revision of the rules properties let for holidays were classed as business and exempt from inheritance tax.

Holiday let tax rules

HMRC had lost an argument for the bungalow to be considered a business, but appealed to the Upper Tribunal in the High Court, which overturned the judgment.

The bungalow belongs to the Pawson family, who say they will appeal the latest decision. Nicolette Pawson, who died seven years ago, ran the holiday let with her son and two daughters.

In court, the family argued the holiday let should be classed as a business because they also provided a cleaner, gardener and caretaker and used a paid laundry service.

The HMRC rules state that a laundry and cleaning service are part of a business, but more should be provided, such as organising car hire, providing a games room and booking restaurants. Without these additional services the property is holiday accommodation, not a business.

Mrs Pawson’s son Nicholas said the family have worked hard to make the holiday home a success.

Accountant John Endactott, who works for a holiday lettings specialist, said the ruling is a “bad decision” that could affect 100,000 holiday home owners in the UK.