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Article updated: 10th September 2019
One only has to look at the exploding popularity of AirBnB to appreciate that ‘home sharing’ is big business. So much so, that having a furnished holiday home which is available to rent for set periods of time has become a standard model of ownership for many people who want a tax efficient property investment they can also enjoy. Compared with other tax efficient investments, the potential enjoyment factor of a holiday home can be much more long-lasting.
If you simply rent a room in your own home, the government offers a tax efficient ‘Rent-a-Room Scheme’. This entitles a taxpayer to earn up to £7,500 tax free from sharing their primary residence. The threshold is halved if you share the income with your partner or someone else. However the legislation on this now means that you must also be staying in the property during the let period.
UK hosts on websites like Airbnb can receive a £1,000 tax free allowance on income earned from renting a property. It is not possible to claim both the £1,000 tax free allowance and Rent-a-Room relief on the same income.
Owning and renting out a holiday home can be particularly tax efficient. The tax advantages of owning a holiday home as a furnished holiday let are that as long as it meets qualifying criteria, such as being available for rent and actually let for a specified length of time each year, it can be regarded as a trading business rather than an investment, and hence attract additional tax reliefs. These include no restriction of mortgage interest tax relief, the potential for the income to be qualifying income for pension purposes, and the potential to qualify for entrepreneurs’ relief on disposal.
For the purposes of inheritance tax, such property has often historically also qualified for Business Property Relief (BPR). This last tax advantage is particularly valuable for the purposes of inheritance tax planning since it provides an effective exemption from inheritance tax, thus enabling individuals to pass significantly more than the £325,000 nil rate allowance onto their families.
However, as the recent tax case involving Mr and Mrs Ross of The Green Door Cottages Partnership highlights, this last benefit has been significantly restricted. Simply offering a furnished holiday property for rent without the provision of additional services is not enough to justify securing BPR for inheritance tax purposes. The outcome of this case, and HMRC’s approach to such investments, mean it is now extremely difficult for holiday homes to qualify for BPR.
HMRC’s approach in assessing eligibility to BPR for holiday property ‘businesses’ is determined by the percentage of trading activity that can be apportioned to the provision of ‘services’, vs the percentage of income that is simply rental income, classified as a passive investment.
This case is particularly noteworthy because Mr and Mrs Ross had a long history of running holiday cottages and other rental properties in tourist spots around the UK. Prior to owning the cottages, the couple also owned and operated a small hotel near the cottages. Due to ill health, they sold the hotel but continued to offer a large range of services to their rental cottage guests, which were fulfilled by the hotel’s new owners. HMRC, and later the tax tribunal, both ruled that the cottages would not qualify for BPR because the amount of service provision offered by the Ross family in relation to overall revenues, related to less than 50% of the income.
Owners in this situation might like to consider whether they can offer additional services in order to qualify for BPR, such as providing meals or travel services, therapies, childcare or excursions. However, as this case highlights, it is necessary to offer sufficient services to alter the nature of an investment into an active business.
The good news is that the other tax advantages of owning a qualifying holiday home continue to apply.
If you were expecting your holiday home to qualify for BPR or have any other questions relating to property taxes, please contact Lesley Stalker by emailing partners@rjp.co.uk
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