Insights

This summer’s staycation boom, the prospect of Brexit and the temporary reduction in stamp duty rates have left many people thinking about owning a holiday home. Before the stamp duty holiday, second homebuyers would pay the standard stamp duty land tax (SDLT) rate based on the property value plus a 3% surcharge. New rates mean that whilst the 3% surcharge still stands, holiday let investors can still benefit from the massively reduced standard rates, as of course can all second homebuyers.

Apart from stamp duty reductions for all property purchases, if you are considering a holiday home rental investment, it is also relatively tax efficient when compared to other residential lets. A furnished holiday let in particular may also offer greater profits than a traditional buy-to let. This article explains the ways in which a furnished holiday let is a tax efficient investment compared with other forms of rental property.

What is a furnished holiday let?

Unlike a residential let, a furnished holiday let is a tenancy that only entitles the tenant to occupy a fully furnished, self-catering property for a limited period. Some mortgage lenders will restrict the amount of time this can be to as little as 31 days. This is also the requirement set by the furnished holiday letting tax legislation.

There are three main conditions relating to the availability and occupancy of a holiday let that must be met in order to qualify for the tax advantages. These are as follows:

• The property must be available for commercial holiday letting to guests and holiday makers for at least 210 days (30 weeks) per year and be actively promoted as such;
• If the furnished holiday let is rented out to the same person for more than 31 days, there shouldn’t be more than 155 days ( 22 weeks) of this type of ‘long term’ occupation per year;
• The property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made it available. The time either you or your family use the property is not included in this total.

What are the benefits of investing in a furnished holiday let?

Holiday lets will typically incur greater commercial risk than normal residential lets and this is presumably why they still attract the tax relief that was withdrawn from other landlords. They are likely to be empty for longer periods making the income less constant and the expenses involved are higher. There are more occupants, there is more marketing required to attract occupants, more end of tenancy cleaning, more wear and tear, plus the requirement to provide furnishings – all of which eat into profits. These expenses remain tax deductible, provided they are wholly and exclusively associated with the business of renting the property. Investments in fittings such as kitchens as well as furniture are also eligible for capital allowances relief.

The reference above to ‘business’ marks the biggest difference between investing in a holiday let and a standard buy to let. A holiday let is treated as a business for tax purposes whereas a buy-to-let is regarded as an investment giving rise to investment income. Unlike the latter, owners of holiday lets can deduct the entire cost of their mortgage interest regardless of other income. This relief has now tapered away for other residential landlords - who now only qualify for basic rate tax relief on loan interest.

Another positive factor influencing people’s interest in furnished holiday lets is that as a trading business, income generated can be invested into a personal pension as ‘relevant earnings’.  Although pensions tax relief and the amount that can be invested into a pension tax free has been eroded, this remains an advantage under the right circumstances.

Since a furnished holiday let is treated as a trading business in terms of allowable expenses, it can also qualify for Business Property relief (BPR) for inheritance tax purposes. This offers advantages for tax efficient inheritance tax planning.

Further down the line if an owner wishes to sell their holiday home, it may also qualify for Business Asset Disposal Relief, giving the seller the chance to pay 10% on gains up to £1m. Eligibility for both these forms of tax relief is complex and will depend on individual circumstances. This is primarily based on the extent to which operating the ‘business’ represents the main commercial activity for owners.

Finally, if you are considering selling a holiday let, the gain arising may attract business asset disposal relief. Alternatively, if you are selling one furnished holiday let to buy another, it may be possible to claim business asset rollover relief. This could enable you to delay paying any capital gains tax due on the disposal. As with the other business tax reliefs available you would need to prove eligibility, but the potential remains.

The government is planning a major review of capital gains tax. If you are interested in considering an investment like a furnished holiday let and want to understand the tax pros and cons, please contact us via partners@rjp.co.uk.