Are you thinking of buying a holiday home to let? Now is the ideal opportunity to invest in a...
If you are looking for important information about holiday homes, tax and all things in between, you’ve come to the right place.
Our guest blog is written by Steve York, Tax Director at PKF Francis Clark chartered accountants. He outlines what to look out for when buying your holiday home, how to run a Furnished Holiday Let (FHL), the tax benefits and implications of owning your own holiday property plus information for you to consider when selling your holiday home.
Tax is not always at the forefront of somebody’s mind when considering buying a holiday home. However, there are a number of tax implications of buying, running and selling a holiday home. This blog, therefore, provides an overview of some of the key tax points to consider over the life cycle of your holiday home, including the specific tax benefits if your property is let as qualifying furnished holiday let (FHL) accommodation, which are not available on other forms of residential letting activities.
Tax can be a complex subject and often turns on the facts of an individual set of circumstances so you should take specific advice. There are additional tax rules for non-UK residents buying and owning holiday homes in some cases. The rules often change and whilst the contents of this blog are correct at the time of writing in September 2020, you should check that the rules have not changed if you are reading this at a later date.
The first tax you are likely to experience is stamp duty land tax (SDLT). If you are buying as an individual and you or your spouse own other residential property then residential rates of SDLT will apply, enhanced by a 3% surcharge. Whilst there is currently a SDLT ‘holiday’ for property values up to £500,000, the 3% surcharge still applies on consideration up to £500,000. Specialist advice should be sought if you are purchasing more than one dwelling as part of the transaction (perhaps you are buying a home with a holiday cottage attached, or more than one holiday cottage in the same transaction), or if what you are acquiring is not entirely residential – perhaps including farmland or a shop.
If you are letting a qualifying FHL, another thing to consider on purchase is the value of the fixtures, fittings, furnishings and integral features within the property. Integral features include items such as water systems and heating systems. You are able to claim capital allowances on these, which reduce your holiday letting taxable profits. If the property has been let previously as a qualifying FHL then you will need to agree with the seller the values of these particular elements – this is known as a “section 198 election”. This needs to be done within two years of purchase. If it has not previously been let as an FHL then you should obtain written confirmation from the seller of that fact.
From the outset, it is important to decide how you are going to operate your FHL business. The tax implications may be different depending on whether you are operating as individuals either in sole names or in joint names, as a partnership (which may sound the same as joint ownership, but is not for tax purposes) or through a limited company. Getting this right from the start can prove beneficial in the longer term as is often harder to change later.
Business rates are likely to be payable rather than council tax, though small business rates relief may apply.
I refer in this blog quite often to qualifying FHL. To qualify, the property must meet the following criteria:
Where the criteria are met in year one but despite best efforts the days letting in later years did not reach the minimum occupancy then it may be possible to make a “period of grace” election with HMRC allowing the property to be treated as a qualifying FHL. The actual criteria must be met at least one year in every three for this election to be available.
When letting an FHL you will be required to report your profits to HMRC on a tax return. Your profits will be the rental income less a number of allowable costs including agent fees, mortgage interest, advertising, repairs (but not “improvements”), accountancy fees, business rates and capital allowances. This is not an exhaustive list, and it may be possible to offset some of the costs you incur before you start letting as well.
If you are not already in the tax system then you will need to register with HMRC by 5 October following the end of the tax year in which you start your business. You will have until 31 January in the following year to file the tax return (earlier if using paper filing).
Your tax liabilities will be payable by 31 January also. You may also need to make payments on account towards the following tax year, payable in January and July. The first January, therefore, following the start of a new business is likely to see a higher tax payment required, being the balance for one year plus the first payment on account for the following year. Capital allowances may mean that there may not be any taxable profits in the early years.
There are different rules if operating as a limited company.
For larger FHL businesses where turnover is more than £85,000 per year, or you have reason to believe that it will reach that level you may need to register for VAT. This means that you will be able to reclaim VAT on your expenditure, but it also means you will need to charge VAT on your rental income.
Hopefully, by the time you sell, the property will have increased in value. A capital gain will then arise, which is taxable. Ordinarily an individual will have an annual exemption to offset against the capital gain of just over £12,000 per owner. One of the benefits of a qualifying FHL is that the capital gain can be taxed at 10% if it qualifies for business asset disposal relief (previously known as entrepreneurs’ relief). There is a lifetime limit on assets that qualify for Business Asset Disposal Relief (BADR) of £1M. If the property is not a qualifying FHL the gain is taxed at up to 28%.
Sometimes families may wish to pass on holiday cottages to the next generation. This is treated as a disposal for capital gains tax purposes; HMRC will treat this as though you have sold it at open market value. For non-FHLs this would trigger a capital gains tax charge but another benefit of an FHL is that gifts can be made with the ability to hold-over the capital gain – meaning that the gift is not subject to immediate capital gains tax.
When you cease to let the property as a qualifying FHL there may be a claw-back of previously claimed capital allowances.
If sadly, an FHL owner dies, there are usually no specific reliefs from inheritance tax for many holiday businesses, though some may attract business property relief in limited circumstances.
The benefits of letting as a Furnished Holiday Let (FHL) over Non-Furnished Holiday Let (non-FHL) rentals include:
It is not possible in a blog like this to provide details on every personal scenario or circumstance but hopefully, it will give a flavour of some of the things to think about during the lifecycle of holiday letting.
If you would like to contact Steve York for your own tailored tax advice then please contact him on his profile.
Steve York is Tax Director at PKF Francis Clark, chartered accountants and business advisers.
For up-to-date information about the temporary reduced rates on stamp duty, visit stamp duty holiday.