Are you considering buying a holiday home/ holiday let or a buy to let? Why you need to know the difference.
With the ongoing travel restrictions, we are all having to holiday at home and “stay local”. As we head into a second summer of staycations, many are considering purchasing a second property to use as a holiday home, with the hope that it will not only be a home from home when they are using it, but potentially a source of income if let out to others for their holiday.
When buying a holiday home, it is important to remember that if it is your second home/ residence in the UK, you will be liable to an additional 3% stamp duty surcharge.
If you are purchasing a property to let out, you should consider whether you are buying an Investment Property or a Furnished Holiday Let and the different tax implications of each.
Furnished Holiday Lettings
A furnished holiday let (FHL) is seen as a tax efficient investment when compared to an investment property. It is viewed as a business for some tax purposes as opposed to an investment.
Furnished holiday lets are still seen as a business as they typically incur greater commercial risk than an investment property with shorter lets, vacancies, multiple tenants, greater expenses relating to advertising and cleaning for example.
The difficulty that most people have with FHL is the period of time that the property has to be let or is available to let means that it may be not be viable to operate a holiday home for themselves.
If your holiday property qualifies as a FHL the main tax advantages over an Investment Property are:
- Claim Capital Gains tax relief for traders, such as Business Assets Disposal Relief (bringing your CGT rate down to 10% on disposal of the property) and reliefs for gift of business assets (if gifting property to children for example)
- The rental profits count as earnings for pension purposes and
- You are entitled to claim Capital Allowances for items such as furniture, equipment and fixtures.
For the holiday let to qualify as a FHL, it must meet the following main conditions:
- The property must be in the UK or EEA
- There must be sufficient furniture provided for normal occupation and visitors must be able to use the furniture.
- The property must be commercially let – with a view to making a profit.
- The property must be available for letting as furnished holiday accommodation to the public for at least 210 days in the year (this cannot include the days you are staying in it).
- The property must actually be let for at least 105 days in the year (excluding days that it is rented to friends or family at reduced rates or long lets of more than 31 days).
Investment Property
The above conditions may not be met for a variety of reasons, such as letting the property for a longer period (commercially it may be more viable to let the property for more than 31 days at a time), you may intend to use the property personally at peak times which would make it commercially unviable to let as a FHL, and it may not suit you to let the property for the required number of days.
In which case the rental income is seen as investment income, and the property is an investment as opposed to a business for the purpose of Capital Gains Tax reliefs.
If you have or are about to purchase a holiday let, we recommend that you document the number of days that the property is available to let, is actually let, to whom it is let to and for how long so that together we can work out whether or not it will qualify as a FHL and the beneficial tax treatment. To discuss your own property or planned property purchase contact Angela Keery, Head of Tax on 028 9032 3466 or email angelakeery@bakertillymm.co.uk