Holiday Lets and Inheritance Tax
That family cottage on the coast might not qualify for the relief you've been assuming it does.
The Furnished Holiday Let regime ended in April 2025. The BPR case law was already hostile. Most holiday-let owners are still planning as though it's 2015.
The real problem
For years, holiday-let owners assumed their property qualified as a business — with the tax reliefs that come with a business. Two things have quietly broken that assumption.
First, the Furnished Holiday Let tax regime was abolished from 6 April 2025. FHLs no longer get their own set of favourable income and capital gains tax rules — they're now taxed as any other property rental.
Second, and more damaging for estate planning: Business Property Relief is very rarely available on holiday lets. HMRC's position, backed by cases like Pawson (2013) and Ross (2017), is that letting furnished accommodation — even with a full cleaning service, welcome pack and full-time letting agent — is 'wholly or mainly the making or holding of investments' and therefore excluded from BPR.
The result: a £1.2m cottage assumed to pass with 100% BPR often passes with 0% relief. That's a potential £480,000 IHT bill on an asset the family had assumed was safe.
What's changed
The abolition of the FHL regime removed the last shred of statutory support for treating holiday lets as a business for tax purposes. HMRC's already-narrow interpretation of BPR now has no counterweight.
To have any realistic chance of BPR, the operation must look and feel like a hotel — 24-hour reception, meals provided, staff on site, additional services well beyond cleaning and linen. Almost no self-catering cottage business meets this threshold. This is not new; what's new is that HMRC now feels considerably more confident challenging the ones that don't.
What this looks like in practice
The typical scenario: a couple in their sixties own their main home in Somerset (£800k) and two coastal cottages let out through Sykes or Toad Hall (£600k each). They've been letting for 15 years, they pay income tax on the profits, and they've always assumed the cottages pass 'as a business' to the children.
On death, HMRC will treat those cottages as investment property. Combined estate: £2m. IHT above allowances at 40%. Because the estate exceeds £2m, the Residence Nil-Rate Band also tapers away, adding further tax on the main home.
With planning: cottages gifted into trust or directly to children over time, life cover written into trust for the balance, and — where the family genuinely runs the properties themselves — a structural review to see whether the operation can be repositioned as a genuine trading business.
Real Story
The Cornwall cottage that failed HMRC's trading test
A cottage the family had run for two decades, and the letter from HMRC that changed the plan overnight.
Read the storyWhere you live matters less than you'd think
HMRC applies the same rules whether the cottage is in Devon or Durham. What varies from one region to the next is asset value and family shape, not the tax code.
We work nationally by video call. Documents are signed remotely or couriered when wet signatures are needed. Almost every client we've helped with this problem in the last twelve months has never set foot in our office — and none of them received worse advice for it.
The local estate planner you were referred to may or may not have handled this specific situation before. The right question is not "are they nearby?" but "have they done this ten times?"
What we'd actually do
- 1
Understand the estate
A short, structured conversation about what you own, where it sits, and who is meant to receive it. No jargon and no product pitch. This alone often reveals the problem.
- 2
Estimate the potential exposure
We estimate the potential exposure — including the changes coming in 2026 and 2027 — and identify which areas need legal drafting, regulated advice, or tax input. You see the shape of the problem, not an assumption.
- 3
Design the plan in the right order
We tell you which two or three decisions move the needle, and which are decoration. Most estates need three or four things done properly, not everything.
- 4
Put it in place and review
Documents drafted, structures set up, life cover written into trust where relevant, and a review schedule so the plan tracks your life instead of gathering dust.
Common questions
Doesn't the FHL abolition mean everyone with a holiday let needs to review?
Yes. The income tax treatment changed in April 2025, and the estate planning implications are still filtering through. If your last review predates 2024, it's out of date.
Is there any way a holiday let can qualify for BPR?
In theory, if the operation is genuinely a trading business — 24-hour reception, meals, on-site staff, meaningful services beyond accommodation — BPR can apply. In practice, HMRC challenges almost every claim and wins most of them. Assume you don't qualify unless you have very specific advice that you do.
What if we gift the cottage to our children now?
A gift is a Potentially Exempt Transfer — if you survive seven years, it falls out of your estate. If you continue to use the cottage yourselves free of charge, it becomes a Gift with Reservation of Benefit and the whole exercise fails. Pay a market-rate rent, or don't use it.
Does it matter which agency we let through?
For BPR purposes, no — using an agency actively hurts, because it makes the case that you're passive investors, not a trading business.
Two ways forward — pick the right lane
Some of what this page covers is drafted and delivered by IMS. Some needs a regulated adviser. Use the CTA that matches what you're actually asking for.
Regulatory notice. Inheritance Made Simple is not authorised or regulated by the Financial Conduct Authority. Where clients require regulated investment or pension advice, introductions are made to independently FCA-regulated advisers.
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