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Buy-to-let Tax Advantages

THE CURRENT TAX ADVANTAGES OF OWNING A HOLIDAY BUY TO LET IN THE UK

(Updated 13 March 2017)

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If you acquire a holiday lodge with the intention of letting it out as a holiday home, you could enjoy a range of tax advantages.

The basic principle is that so long as certain conditions are fulfilled, furnished holiday lettings will continue to be treated as a trade, rather than an investment activity, for tax purposes.

The basic conditions 

The criteria that apply for the lodge to be treated as a furnished holiday letting trade are:

  • That it is furnished
  • It must be available to let for at least 210 days a year
  • It must be let for at least 105 days
  • It must not be occupied by the same tenant for more than 31 consecutive days or if it is occupied by the same tenant for more than 31 days, no more than 155 days of such “long term occupation” in total

These requirements may be difficult to fulfil, as the owner may fail to let the property for 105 days year in, year out. However, businesses that do not achieve this target every year will be able to elect to be treated as if they met the rules in the two years following a year where the criteria are met. Consequently, so long as the new condition is met at least once every three years and it is apparent that in the years that fail it is not for the want of trying, then the furnished holiday letting status will be retained.

Should you have more than one furnished holiday let, the occupancy rules may be applied across all properties on an average basis rather than looking at each property in isolation.

Income tax and losses

The income from your furnished holiday letting business is determined after taking into account all the costs (other than the cost of the lodge itself) incurred in respect of the letting business, including, but not restricted to, repairs and renewals, maintenance costs, agency fees, finance costs, etc..

Losses arising from the letting activity cannot be offset against other income and can only be carried forward against future profits arising from the same letting business.

A word of warning - relief for losses may be denied if HMRC successfully contend that lettings have not been on a commercial basis.  For example, using the lodge yourself in peak seasons or letting it at a reduced rent to friends and family would probably lead to the losses being disallowed.

Capital allowances

You will be entitled to Capital Allowances on the furniture, furnishings, white goods etc that are in the log cabin or lodge, as well as plant and machinery used outside the property, but there are no capital allowances for the cost of a log cabin itself, which is immovable. However, there are some capital allowances for a holiday lodge capable of being moved and sited on a licensed holiday park.  The allowances are set against your letting income to determine the taxable result.

Pensions

The net income derived from furnished holiday lettings is treated as relevant earnings for pension purposes.

Self Invested Pension Plan cannot invest in furnished holiday property.

Capital Gains Tax

Once the furnished holiday letting business has been owned by you for a complete year, any subsequent sale will be eligible for Entrepreneur’s relief and, so long as the owner has not used up their life time allowance of £10 million, the gain will be taxed at 10% rather than 18%, or potentially 28%.

The property will be eligible for roll over relief by means of which the payment of Capital Gains Tax can be deferred.

Inheritance Tax

The lodge may attract Business Property Relief from Inheritance Tax, although two criteria have to be met in order to qualify.  Firstly, the lodge must have been used in the furnished holiday letting business for at least two years prior to death and secondly, either you as owner, or someone acting for you must be substantially involved with both the property and the holiday makers, carrying out activities such as:

  • advertising for and interviewing prospective tenants
  • repairs and maintenance
  • provision of laundry and cleaning services
  • dealing with tenant’s complaints

If, on the other hand, HMRC regard the property as an investment, Business Property Relief will not be available.

You should seek the advice of an accountant to ensure that you keep the appropriate records and make the correct returns to HMRC in order to maximise the tax advantage of your investment.

 

We are indebted to

Jon Cable of Harwood Hutton Limited, 22 Wycombe End, Beaconsfield, Bucks HP9 1NB

Tel: 01494 739500

www.harwoodhutton.co.uk

 

for providing us with this information and if you don’t have an accountant of your own and would like

to ask Jon how this information might affect you personally, he will be delighted to hear from you.

 

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