By Neil Armstrong, Tax Director 

We are a region known for our stunning coastlines and sometimes sunny beaches. Approaching the summer after years of travel restrictions that changed the way we holiday; many will once again be considering purchasing a second home for an occasional getaway.

Nowadays these properties can be both a second source of income and a home from home in the summer months. Once established, they are fairly easily managed and come with attractive tax benefits, but certain conditions also determine their profitability.

Regardless of the home’s purpose, purchasing a second property in the UK requires an additional 3% stamp duty, a price most people can look past when weighed up against the potential earnings. It is whether the home qualifies as a Furnished Holiday Let (FHL) or an Investment Property that will determine its ultimate earning potential.

Viewed as a business rather than an investment, FHLs are a tax efficient way to operate a holiday home. Though they incur greater commercial risks with shorter lets, multiple tenants, and higher expenses such as advertising and cleaning costs, they also bring more tax allowances.

In an FHL, the landlord’s rental profits count as earnings for pension purposes; capital allowances are available for expenditure on items like furniture, equipment, and fixtures; and Capital Gains Tax relief such as Business Assets Disposal Relief also apply.

Yet while the prospect of topping up the pension pot with earnings from a second home seems ideal, the conditions of an FHL may limit your ability to enjoy the property yourself. To qualify, it must be available for letting as furnished holiday accommodation to the public for at least 210 days each year, excluding the days you spend there yourself.

Of these, it must be actually let by tenants 105 days of the year, not including long lets of more than 31 days or the periods when family and friends visit.

This is where individuals must sit down to consider the number of days the property will be available to let, actually let, to whom it is let, and for how long in order to assess its earning potential.

For those who wish to rent for a longer period or use the home themselves at peak times, the rental income will be seen as investment rather than business income, therefore less tax efficient with Capital Gains Tax relief ruled out.

This year’s holiday season comes just months after HMRC warned landlords of short-term rentals, including Airbnb and hosts, to declare all income from the property to remain compliant. In most cases, landlords receive a tax-free allowance of £1,000 per year.

Just like any residential property, selling a second home also requires Capital Gains Tax liabilities to be reported and paid to HMRC within 60 days of completion. It is recommended that residential property owners check their tax position if they wish to sell, to ensure they avoid unnecessary costs like interest and penalties for noncompliance with HMRC.

Despite these obligations, holiday homes can be a profitable venture if approached correctly and have the added benefit of the occasional getaway, hopefully when the sun is shining, and our coastlines are at their best.

Landlords are advised, however, to seek the advice of a professional and put time and resource into considering the tax obligations before any purchases are made or suitcases packed.

To discuss any aspect in more detail contact Neil Armstrong, Tax Director E: T: 028 9032 3466

This article first appeared in the Irish News on 30th May 2023.