Owning a second home is an attraction for us all as an investment but also for stable income stream.Firstly, let us gain an understanding of how a Furnished Holiday Home differs to a normal buy to let property investment:
It can be a static mobile home i.e. a “caravan”
A purpose built holiday home (we are seeing many more of these sites being built – no tax for tax mitigation)
A normal residential property can be bought and then run as a holiday home. Must be fully furnished
Must let property for 105 Days
Must be available for let for 210 Days
Cannot let for longer term lets of more than 155 days during the year
Must be in the European Economic AreaComparing the Tax BenefitsCapital AllowanceThe ability to write down depreciation of the assets against income tax
Buy to Let: No, only running expenses
Furnished Holiday Let: Yes. This is attractive as an additional expense when capital spend/make improvement you make plus normal running expensesInheritance TaxThe ability to use Business Property Relief (BPR) i.e. pass on the asset free of inheritance tax.
Buy to Let: Inheritance Tax may be payable as it is not a business
Furnished Holiday Let: It is a business asset, can claim 100% BPR i.e. No inheritance tax payableIncome Tax (CGT)Profits on rents after running expenses are taxable
Buy to Let: Yes, payable
Furnished Holiday Let: Yes, payableCapital Gains TaxPayable on both types of property (after allowances).
Buy to let: Yes, payable at 18% (basic rate taxpayers) and 28% (higher rate tax payers)
Furnished Holiday Let: May benefit from Entrepreneurs’ Relief when selling your holiday let as it is as a business asset. CGT on business assets is 10% for the first £1m of gains rather than 18%-28%.
Roll-over Relief: May be able sell your furnished holiday home and roll over capital gains into another “business” furnished holiday let and not pay capital gains taxCouncil TaxBuy to let: Tenant will payFurnished Holiday Let: off settable as an expense apart from periods of longer term letWhat to watch out forIn a recent test case Pawson (deceased) v HMRC , HMRC attempted to block 100% business property relief on the property claiming that no service was being provided by Pawson. In short, it was not being run as a service business holiday home. A Tribunal overruled HMRC sighting the regular turnover of guests, on-going services for cleaning, bedclothes, television, telephone etc. in the cottage made it a holiday business allowing BPR and not an investment subject to IHT.
Our viewA great opportunity to save tax and own a holiday property. Make sure it is commercial service for paying guests, brochure, on holiday let websites, local guide in the property, provide towels, water, etc.You can stay there yourself for long periods as well as letting to your family and friends (at market rate though).Worth considering as an alternative to buy to let.Definitely worth considering for efficient inheritance tax planning.
Contact us today for a free callback and learn how you could be saving tax with a holiday home. secure.needanadviser .com/html/contactus.php/zcid/1397/type/article