Darnells July 2013
This time of year our thoughts turn to perhaps taking a short break to a holiday cottage somewhere picturesque in the UK, but have you ever thought of owning and letting your own holiday home? What are the tax advantages and disadvantages of such an investment?
For tax purposes the term “Furnished holiday accommodation” relates to the short term let of furnished, holiday accommodation rather than longer term letting of properties typical of the residential market.
There is no restriction to particular kinds of accommodation and so houses, flats, caravans or other types of accommodation will all potentially qualify.
Benefits
The favorable tax regime for furnished holiday letting accommodation has been significantly amended in recent years but there are still benefits to be had from this treatment.
Most importantly, the regime has been extended to cover qualifying property located anywhere in the European Economic Area (EEA) whereas previously it was only properties in the UK.
The main benefit of the FHL treatment comes when you come to sell your holiday home, in that you may qualify for certain capital gains tax reliefs; in particular business asset roll-over relief, if you sell your holiday property and, within 3 years, reinvest in another holiday letting property that costs the same or more than the proceeds received for the original property. You may be able to defer paying CGT until you sell the new property.
You may also benefit from Entrepreneurs’ Relief when selling your holiday let as it is treated as a business asset. This means that you benefit from the business rate of CGT, which equates to 10% on the first £10m (previously £1m) of gains, rather than the personal rate of 18% or 28%.
One area of previous benefit that has now gone is that losses arising in an FHL business can no longer be set against other income of the tax payer. This change applied for the 2011/12 tax year onwards. It is also now necessary to separate losses into UK and EEA losses since each can now only be offset against profits of the same or future years in each relevant sector.
Tax on Rental Income
Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs and agents letting fees. In contrast to the letting of other residential property it is also possible to claim capital allowances, a form of tax depreciation allowance on the capital cost of furniture and kitchen equipment.
‘Qualifying holiday accommodation’
You must satisfy certain conditions regarding the availability, the letting and the pattern of occupation in order for your holiday home to qualify for the special treatment. The criteria to be met are as follows:
1. The property must be located in the UK or EEA
2. It must be available for holiday letting to the public for at least 210 days of the year as of April 2012 (was previously 140 days). An important point to note here is that the 210 days will apply to the first 12 months of letting from the very first day of letting a new property; thereafter the 12 month period is the tax year in question.
3. It must be occupied by paying guests for a minimum of 105 days in the year from April 2012 (previously 70 days).
4. It must be furnished but there is nothing in the legislation to specify the minimum amount of furniture required to qualify.
5. Individual lets should not exceed 31 days and your holiday home must not be let to the same person for more than 31 days in the year.
Provided there is a genuine intention to meet the letting requirement, it is possible to make an election to keep the property as qualifying for up to 2 years even though the condition may not be satisfied in those years. This will be particularly important to preserve the special capital gains tax treatment of any gains as qualifying for the lower CGT rate of 10% where the conditions for Entrepreneurs Relief are satisfied as mentioned above.
Inheritance Tax
The value of the Furnished Holiday Let may be accepted by HM Revenue and Customs as being outside the owners estate for IHT purposes although this will only be the case where a relatively significant level of services are provided to holiday makers in addition to the basic provision of accommodation.
Darnells accountants in Newton Abbot and Totnes have specialists dealing in this area of taxation. Please contact Stewart Rae or Valerie McClean if you would like further advice in this regard. 01626 358500 or via email info@darnells.co.uk.
A range of factsheets and news updates can be found on Darnells’ website at www.darnells.co.uk
First Published July 2013 By The Dart
