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 Area
Comparing the Tax Benefits
The 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 expenses
The 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 payable
Income Tax (CGT)
Profits on rents after running expenses are taxable
- Buy to Let: Yes, payable
- Furnished Holiday Let: Yes, payable
Capital Gains Tax
Payable 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 tax
Buy to let: Tenant will pay
Furnished Holiday Let: off settable as an expense apart from periods of longer term let
What to watch out for
In 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.
A 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.