Is it time for a holiday home?
Ma ny who i nclude residential property as part of their savings/ retirement plans are these days increasingly looking at holiday homes (furnished holiday lets, or FHL) in preference to the traditional buy-tolet (BTL) properties.
This preference is driven by FHLs offering potentially much greater yields compared to BTLs plus a far more attractive tax profile… especially following recent changes introduced by HMRC to dampen down the BTL market.
It can be relatively easy to convert a BTL property to a FHL with the main FHL conditions being:
• The property must be furnished • It has got to be within the UK or EEA • It must be available as a FHL for at least 210 days within a tax year AND actually be let commercially as holiday accommodation for 105 days or more
• If occupied by the same long-term tenant for more than 31 days these periods must in total amount to less than 155 days
In practice HMRC allow a modicum of flexibility if there are one or two years where a given property fails the 105-day test and averaging is allowed where more than one FHL is held. That said, a given property in a particularly unpopular location is unlikely to meet the occupation test so wouldn’t be eligible.
Those properties which are able to meet the above conditions enjoy the following tax advantages:
• Full tax relief for interest costs
incurred on associated borrowing • Profits count as earnings for pension purposes… t hough without a national insurance bill on those profits
• Reliefs are available to reduce or defer capital gains tax when the FHL is sold… including gift relief, roll-over relief and (in some cases) entrepreneurs’ relief (reducing an otherwise tax rate of 28 per cent to only 10 per cent) • Tax relief (capital allowances) can be claimed on furniture and equipment as well as integral electrics, heating and plumbing systems (overlooked by many in our experience)
A combination of the above advantages can make FHLs ideal vehicles as part of an investment portfolio. FHLs are not tax-exempt for inheritance tax purposes but careful planning can result in them being transferred between generations without triggering tax liabilities.
Clive Relf is private client tax partner at Kreston Reeves.