Future foundations: focus on property (article 3)
Is it time for a holiday home?
This article is the third in a series in which we focus on property issues in our bi-monthly e-newsletter for individuals and their families, Pathfinder – personal tax and wealth (sign up here). Over the next few editions of the e-newsletter we will further explore the most common property tax issues our clients are asking us about. Whether a landlord, or simply someone looking to utilise property as an investment for their (and their family’s) future, this series will seek to advise you on your options, and prevent you from falling foul of any unforeseen tax implications!
In this article we look at the tax advantages of investing in a furnished holiday home (FHL)…
Many who include residential property as part of their savings/retirement plan are these days increasingly looking at holiday homes (furnished holiday homes, or FHL) in preference to the traditional buy-to-let (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’s 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 is 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…though 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% to only 10%)
- 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.
To find out more about how an investment in a FHL might help in your own circumstances please speak with your usual Kreston Reeves adviser, or contact us here or on +44 (0)330 124 1399.
Look out for the next property focussed article in February’s edition of Pathfinder – Personal tax and wealth update. To sign up to receive this complimentary bi-monthly newsletter, and other Kreston Reeves publications/event invitations, please click here. There is also the option to subscribe to receive our exclusive ‘property and construction’ sector updates, events and webinars for those with particular interest in this sector.
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