In the 2009 budget, the Chancellor of the Exchequer made certain  changes to the tax 'advantages' of owning a furnished holiday letting. We have now added the changes to our text and highlighted them in red making it easier for you to see exactly which they are.

Currently, the Trade Bodies of the Industry are making representation to Government on the effect these changes will have on the holiday lodge/log cabin letting industry. We will update this page, as and when we learn anymore.

  THE TAX ADVANTAGES OF OWNING A HOLIDAY  BUY TO LET

If you acquire a holiday lodge or log cabin with the intention of letting it out as a holiday home, you could enjoy a range of tax advantages, which are available until 2010. The 2009 budget put paid to these advantages from 6 April 2010, when holiday homes will be treated as investment assets in the same was as residential buy-to-let properties.

The initial requirement is that the holiday lodge or log cabin must be let on a basis that falls within the HM Revenue & Customs (HMRC) definition of a furnished holiday let and to achieve that, the following criteria have to be met:

• The lodge/log cabin is furnished

• It must be available for commercial letting to the public as holiday accommodation for at least 140 days a year; and

• It must be let for at least 70 days; and
• It must not be occupied by the same tenant for more than 31 consecutive days 

These measures are usually applied to tax years, but if the lodge/log cabin has not been let in the previous tax year, the period of 12 months starts with the date on which it is first let, thus allowing a letting business to qualify, even if it started less than 140 days from the end of a tax year.

Once these criteria have been fulfilled, the holiday letting will be treated as a trade with the following principal tax advantages until 5 April 2010:-

  Income tax

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

The rules following the 2009 budget changes do not affect this aspect, other than a wear and tear allowance will potentially be available if the lodges or log cabins are let fully furnished.

Losses arising from the letting activity can be offset against all general income arising in the same tax year or the previous year, against capital gains arising in the same year and if the loss arises in the four years following the commencement of the trade, it can be taken back against general income of the three years preceding the loss. Any remaining unrelieved loss can be carried forward against future profits arising from the same letting business.

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

From 6 April 2010 onwards, any losses arising will only be available to offset against other letting profits and any surplus losses will only be available to carry forward against profits arising from the letting business in future years.

  Capital allowances

Lodges built to BS3632 or BS EN 1647 

You will be entitled to Capital Allowances on the furniture, furnishings, white goods etc that are in the lodge, as well as plant and machinery used outside the property.  Capital allowances should also be available for the lodge itself if HMRC accept that the structure and its location fulfil the conditions under which it falls to be defined as a mobile home or caravan for tax purposes.  The allowances are set against your letting income to determine the taxable result.

 

From 6 April 2010 these capital allowances will no longer be available, but are replaced by the wear and tear allowance mentioned above.

Log cabins built to Building Regs. or other 

You will be entitled to Capital Allowances on the furniture, furnishings, white goods etc that are in the log cabin, as well as plant and machinery used outside the property, but there are no capital allowances for the cost of the log cabin itself.  The allowances are set against your letting income to determine the taxable result.

   Pensions

The net income is treated as relevant earnings for pension purposes, until 5 April 2010.

  SIPPS – Self Invested Pension Plans 

In theory, provided the holiday lodge/log cabin is let purely to others and not used by the owner or friends and family, it does fulfil the criteria to be part of a SIPP.

However, we could not find a SIPP provider who would touch it, on the basis that should this step be taken and HMRC disagreed and classified the lodge/log cabin as taxable property, they could impose tax charges of up to 70% of the value of the holiday lodge/log cabin as well as possibly deregistering the SIPP.

A risk too high to be taken and in any event the 2009 budget changes will remove any possibility of investing in a holiday lodge or log cabin through a SIPP.

  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 £1million, the gain will be taxed at 10% rather than 18%.

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

These advantages disappear after 5 April 2010 following which, capital gains arising on disposal of the property will be taxed at 18% (assuming no changes to the CGT rates in the meantime) and no roll over relief will be available.

  Inheritance Tax

The lodge/log cabin may attract Business Property Relief from Inheritance Tax, although two criteria have to be met in order to qualify.  Firstly, the lodge/log cabin 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 and from 6 April 2010 this will always be the case.

 

The above is a brief outline of the main tax advantages that may be enjoyed in respect of letting a furnished holiday lodge/log cabin for a limited period up to 5 April 2010, after which date these advantages will no longer apply. In the meantime, you will not only benefit from the rental income, you can also obtain tax relief for your costs and should you sell the lodge at any time up to 5 April 2010, the capital gain may be taxed at only 10%.  Your family can also benefit from the potential growth in the value of the lodge in an effective Inheritance Tax shelter.

If you would like the information direct from the Government web site, please click the following URL  to download:-

http://www.hmrc.gov.uk/budget2009/furnished-hol-lets-1015.pdf

 

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, Harwood Hutton, 22 Wycombe End, Beaconsfield, Bucks HP9 1NB

Tel: 01494 739500

    

www.harwoodhutton.co.uk

for providing us with this information. If you don’t have an accountant of your own and would like to ask Jon how this information might affect you, he will be delighted to hear from you.