Is it time for a hol­i­day home?

Kent Life - - Promotion -

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.

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