The Cornwall Cottage That Failed HMRC's Trading Test

Three cottages on the north Cornwall coast, near Padstow. The parents had bought the first in 2001, added two more over the following decade, run them personally at first and later through a mid-market letting agency. Combined value on death: around £1.9m.

The family — three adult children, all working professionals — had assumed the cottages passed with 100% Business Property Relief. That's what the accountant had said in 2015. Nobody had revisited it since.

The father died in early 2025. The IHT return, prepared by the family solicitor, claimed BPR on the cottages. Nine months later, HMRC opened an enquiry.

HMRC's position was familiar to anyone who has read the Pawson and Ross cases. The cottages were let furnished; a cleaning company handled turnovers; a booking agent handled reservations. The owners themselves did no more than pay bills and occasionally choose new curtains. In HMRC's view, this was 'wholly or mainly the making or holding of investments' — the exclusion in section 105(3) of the Inheritance Tax Act 1984 — and BPR did not apply.

The additional IHT bill was £484,000, plus interest. The estate had already been partially distributed. Two of the three children had used their share to reduce their own mortgages.

The estate should have been reviewed when the FHL regime was announced for abolition in the March 2024 Budget, and again when the Pawson-line of cases hardened in the years before that. A cautious plan would have assumed BPR did not apply, and structured accordingly.

Lifetime gifts of the cottages — into trust or directly to the children — could have started the seven-year IHT clock years before death. Life cover, written into trust, could have funded the tax bill without any distress to the estate. The cottages could also have been reviewed for genuine trading-business status: 24-hour reception, meaningful additional services, on-site staff. The family didn't want to run a hotel, and that's fair — but they should have been told, plainly, that they weren't running one and shouldn't plan as if they were.

The family reached a settlement with HMRC on the BPR claim — they accepted the assessment on two of the three cottages and successfully argued for partial trading treatment on one (which they had operated more personally). Total tax paid: £380,000.

The surviving mother, in her late sixties, immediately gifted her half-share in the cottages to the three children under a properly documented lifetime gift, starting the seven-year clock. Life cover was put in place to fund the potential IHT if she died within seven years — an insurance product priced for the risk, held in a discretionary trust so the pay-out would fall outside her estate.

The remaining planning tightened everything else: her main residence was reviewed for RNRB compliance; her ISAs were restructured to include some AIM BPR-qualifying investments; her will was rewritten to use both nil-rate bands cleanly.

If you own furnished holiday lets, assume BPR does not apply unless you have specific, recent, written advice that it does. Plan on the basis that HMRC's position — hostile since 2013, hardened in 2024, and unopposed since the FHL regime ended — is the reality.