Landlords should be aware of the different rules which apply to furnished holiday lets and private rented properties, as the tax implications can be enormous.
Privately rented properties that are not the owner’s main home and therefore do not qualify for principal private residence relief, are normally subject to capital gains tax at 18 per cent or 28 per cent on disposals – a cost potentially amounting to tens of thousands of pounds.
However, where properties are furnished holiday lets (FHLs), they may be eligible for entrepreneurs’ relief and are therefore subject to capital gains tax at 10 per cent on disposal.
There is another, more immediate tax advantage of FHLs that could make quite a difference. New restrictions on mortgage interest relief, which came into effect on 6 April 2017 and threaten to move an estimated 400,000 UK landlords into higher income tax bands, do not apply to FHLs.
For a property to be classified as a furnished holiday let, it must meet three conditions, set by HM Revenue & Customs:
- The pattern of occupation condition – the total of all lettings that exceed 31 continuous days may not be more than 155 days of the year.
- The availability condition – the property must be available for letting as furnished holiday accommodation for at least 210 days in the year.
- The letting condition – the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year, excluding any days when the property is let to friends or relatives at zero or reduced rates.
Should you have more than one FHL and one fails to meet the 105-day letting condition, you may instead apply an average across all furnished holiday lets that you own.
Property expert and Partner, Toni Hunter, said: “The rules are quite stringent and can become difficult to manage. It only takes a difficult season, or change in personal circumstances to scupper your FHL status. Whether operating FHLs or standard residential lets, now is a good time to review your long-term investment plans. The changes to taxation of property income introduced by George Osbourne in Autumn 2015 are now in place, and failure to plan can be costly. Many of our property clients are opting for creating a limited company as an alternative to paying higher rate tax on more of their rental income, but this decision must be made with your personal investment goals and tax status in mind.”
We understand that effective tax planning is a serious challenge for anybody investing in property or companies developing or managing properties. We’ve recognised the complexities in this area and have an in-house property tax team to help and guide clients with property tax issues. Find out more about how we can help here.
You can also download our handy ‘Residential Property Letting – A Private Landlord’s Guide’ here.