Holiday cottages ( or furnished holiday lets ) are a funny creature. For NIC purposes they are not a business but for some really important reliefs they have always been regarded as a business.

One of these reliefs, business property relief, means that traditionally there would be no inheritance tax to pay on a holiday cottage. With IHT rates as high as 40% this was a valuable concession.

However the recent Pawson case looks as if all this has been overturned.

Basically the executors of the estate will need to show that the business activities have been much more than maintenance and taking bookings. You have to look to what a hotel or B&B would provide as an idea. So these might include

1. Cooking and provision of meals ( think a courtyard of cottages and maybe a tea room attached)

2. Activities on site such as organised trips.

3.On site services such as massages or baby sitting.

To me it looks like this level of service would be tricky for single cottages and ones which are remote or isolated.

If you have a number of houses close to many attractions and you or a manager live on site or nearby then there is a chance for you but otherwise?

So if you think that you can’t meet these conditions then what are the alternatives?

1. Make a PET ( potentially exempt transfer). Gift the cottages to your beneficiaries. As long as you live more than 7 years after the gift then there is no inheritance tax. Death earlier than 7 years might attract taper relief to help reduce the tax.

2.Life insurance to cover any IHT liability.

3. If the cottages are merged with a larger business, for instance farming, then the whole might well be considered a business.