The tax advantages and disadvantages of staycation investment
If you already invest in property, you will be used to your buy-to-let business being treated as investment activity. Furnished holiday let property is treated differently. The taxman considers it to be a trade rather than an investment. Therefore, it is taxed differently.
In a recent article in which I discussed the reasons why holiday lets might be a good investment for you, I touched on the tax advantages of holiday let property. In this article, you’ll learn more about these advantages and also discover some potential disadvantages of tax on holiday lets.
What is a holiday let?
For the holiday let tax rules to apply, your property investment must be a holiday let. It must pass certain conditions set out by HMRC. These are that the accommodation must be furnished, self-catering, and:
- Be let on a commercial basis with the aim of making a profit (A tip here is to ensure that you have a business plan, including cash flow projections that show you expect your investment to be profitable in the future)
- It must meet the occupation requirement
What is the occupation requirement?
During a 12-month review period (typically the tax year, or your business’s financial year), the requirements include that:
- The holiday let must be available to be rented as a holiday let for at least 210 days
- It must be let for at least 105 days
- If let to the same tenant for a period of 31 days or more consecutively, the holiday let must not have any more than 155 days of such longer-term letting
These rules apply to you if you own one-holiday let or multiple holiday lets. However, if you do own more than one holiday let, you can amalgamate them and average them out. This means that if one of your properties fails to let for 105 days, you can count some days from another property to make up the shortfall.
Once a property has been given holiday let status, it will continue to be classed as a furnished holiday let even if it fails to meet the above occupancy requirement in a second and third year. It is only after three consecutive years of occupancy requirement failure that the property ceases to be considered as a furnished holiday let. Effectively, you need only meet the occupation requirement once every three years for your property to be taxed as a holiday let.
The tax advantages of holiday let property
Now we’ve established how a property would qualify as a holiday let investment, let’s consider its potential tax advantages:
You can capital expenses against tax
You can claim for capital expenditure against your tax liabilities. The general rules for this allowance are:
- The expense must be incurred ‘wholly and exclusively’ for the holiday let
- It must be a ‘capital’ expense – usually one-off purchases or payments, including on property improvements
You should make sure that you keep all invoices and receipts because you will need these when making a claim for allowable costs against capital gains tax (CGT) liabilities should you sell your holiday let property.
Other reliefs you could claim against CGT liability
Because it is classed as a trading business, you may also be able to reduce your CGT liability by claiming:
- Entrepreneurs’ Relief, which could reduce your CGT rate from either 18% or 28% (depending upon your tax position) to 10%
- Roll-over Relief, which allows you to defer your CGT payment if you plan to buy another holiday let with the proceeds of the sale
- Hold-over Relief, which allows you to gift the property with the CGT liability frozen until the recipient sells
As you can see, there are many benefits that you could reap when you sell your holiday let. Now, let’s look at the tax advantages while owning your property and letting it to holidaymakers.
Equipping your holiday let is a business expense
Because a holiday let property is classed as a business, the cost of fitting it out is a business expense. Up to £200,000 of expenditure on items such as furniture, fixtures and fittings and equipment could qualify for 100% Annual Investment Allowance (AIA). You can’t claim such expenses against the profits on an ordinary buy-to-let property.
Utility bills and council tax become tax allowable expenses
You won’t be charging your holidaymakers separately for utility bills and council tax. Therefore, these become a cost of doing business, which can be fully offset against your profits.
You can claim a list of expenses
You need to kit a holiday let out. The furniture, fixtures and fittings and equipment you buy for the holiday let property are all considered as expenses of the business, and so you can claim against them as you would for other business expenses. Such expenses include:
- Property management fees
- Maintenance, repairs and cleaning
- Advertising costs and letting commissions
- Website Costs
- Insurances (buildings, contents, public liability, etc.)
- Interest on loans used to make improvements (note this is the interest you pay, and not the capital borrowed – which is treated as allowable against capital gains)
Your mortgage payments are offset against your gross holiday let income
Changes to property tax are reducing the tax relief on buy-to-let mortgages for property investors. These changes don’t apply to furnished holiday let properties. Your mortgage interest payments are classed as a business expense and deducted before tax liability is calculated.
Maximise tax advantages by making pension contributions
Any income you receive from your holiday let is classified as ‘relevant earnings’. If you don’t need this income, you could use it as a contribution to a pension scheme. Should you do this, you’ll get tax relief on these relevant earnings – effectively, the government will add money to your pension contribution.
Split your holiday let profit to maximise your personal tax position
If you own a buy-to-let property with your spouse, the profits should be split in the proportion of your holding for tax purposes. This rule doesn’t apply to holiday let properties. You can split the profits how you wish, thus maximising your individual tax positions.
Potential tax disadvantages of holiday let property
Of course, the taxman is not going to let you have everything your way. Where there are so many lucrative tax advantages, HMRC will try to grab something back.
You can’t offset losses against other income
If you make a loss on your holiday let properties, you cannot offset that loss against other income to reduce your overall tax liability. However, as with other businesses, you can carry losses forward to offset against future holiday let profits.
You could be liable to VAT
As a business, a holiday let property venture is potentially liable to VAT, if your turnover exceeds the VAT threshold. For this to be the case, you will need to let out your holiday let property for more than £1,500 per week for 52 weeks of the year.
If you already own a business, the turnover from your holiday let investment will be added to your current business turnover when calculating liability to pay VAT. However, you may be able to avoid the need to register for VAT in such a case if you run one business as a partnership.
You’ll need to declare a holiday let income on your Self Assessment
Should you receive an income from your holiday let property investment, you must declare this to HMRC by Self Assessment.
A holiday let property investment provides many benefits. You could use it as a bolthole for a little rest and relaxation when it is not let to holidaymakers, and family and friends are a good source of business. By letting to holidaymakers, you could make a very lucrative income. Plus, your property could produce a very healthy capital gain over the longer term.
However, before considering a holiday let investment (or reclassifying existing property in your portfolio as a holiday let), you should consider the tax advantages and disadvantages of doing so. While tax should never be the reason for making an investment (a poor investment will lose money no matter the tax position), it is likely to be a factor in your investment planning.
This tax guide to holiday let property investment is for general advice. Whatever investment you are considering, you should always seek specific advice pertinent to your unique circumstances. However, the tax advantages of holiday let property investment could be the boost your investment portfolio needs to accelerate you toward your investment goals.
To learn more about the advantages and benefits of holiday let property investment, contact Gladfish today. In the meantime,
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