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How to make property pay with holiday lets

Thursday, 24 November 2011 11:42 AM

By Mike Fleming

As financial turbulence continues to affect the property market, now may not seem a good time to invest in property.

However, there are in fact several ways to make investment in property pay, even in the current climate. If you have the capital to support a borrowing, huge tax savings can be made through buying a furnished holiday let property - not only on initial investment but also on the income generated by the property as well as potential gains made when you sell.

Here's how it works. If you sold a business (or any assets used in your business) you would automatically be charged Capital Gains Tax (CGT). Sale of the former would entitle you to claim Entrepreneurs Relief, reducing the Revenue’s tax take to 10%. However, if you sold an asset in use in the business, your CGT would be at a rate of 28%, as it would not qualify you for Entrepreneurs Relief.

Significantly, if you invested the proceeds from the sale of your business into a qualifying furnished holiday let, you would be entitled to holdover the gain on the disposal of the first asset against the acquisition costs of the furnished holiday let, so removing the need to pay CGT.

It's worth being aware that the criteria for what qualifies as a Furnished Holiday Let change dramatically on 6th April 2012. However, as the purchased property only needs to qualify as a furnished holiday let for a tax year in order to absorb the gain on the sale of your business, if you act now this need not affect you.

If the property subsequently ceases to qualify as a furnished holiday let, the fact that it is no longer classed as a business asset does not make you liable to pay any extra tax.

There will be three new tests which the property must pass in order to qualify as a furnished holiday let from 6th April next year:

Availability - the accommodation must be available for commercial letting as holiday accommodation to the public for at least 210 days.

Letting Conditions - during the 210 days in which the property is available for letting it must be sole let for at least 105 days.

Occupation - the accommodation must not be let for periods of long term occupation for more than 155 days of the year. The legislation does not prevent you as an owner occupying the property for part of the year; provided you move out during the letting season and live elsewhere the property continues to qualify as a furnished holiday let.
The legislation surrounding these issues is complex but HMRC have issued some useful helpsheets which can be found on their website:

Capital Gains Tax Entrepreneurs Relief (Helpsheet 275)
Business Asset Rollover Relief (Helpsheet 290)

An accountant can advise on other linked strategies which will help drive down the tax payable on the rent your property generates. For instance, you should consider the way in which the property is owned, particularly if you are married and there is a significant difference in your income levels.

In general it's best to hold investment property as 'Tenants in Common' as you can then make an election to HMRC to allocate profit to the spouse with the lowest rate of tax. You will need to review this on an annual basis at least and enlist professional help to confirm what needs to be done to support the claim.

It’s also worth bearing in mind that there are inheritance tax implications; should the owner of a rental property pass away, the inheritor stands to pay inheritance tax on the gain of the property. However, if the property is a holiday let the inheritance tax payable is nil, due to its status as a business asset which renders it exempt.

An investment into a furnished holiday let is an attractive proposition, even taking into account the forthcoming changes. If you think this strategy could work for you, it’s well worth consulting an accountant to help you explore the options.

Mike Fleming CTA, TEP. is tax director at Straughans Chartered Accountants.

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