Holiday home investment: the tax implications

Whilst the holiday season may be over, and the last of the summer sun firmly behind us, holidays are still a hot topic of conversation in the accounting world as now is one of the most popular times of the year to consider investing in a holiday home.

But what is the tax legislation surrounding these unique property business opportunities?

These lets can be seen as a “halfway house” between ordinary buy-to-let properties like hotels or B&Bs.

A furnished holiday let requires the following conditions:

• Furniture for the occupiers to use.
• Located in the UK or in the European Economic Area.
• Available for letting to the general public for at least 210 days in the tax year.
• Was actually let commercially as holiday accommodation for 105 days or more.
• If occupied by the same long-term tenants for more than 31 days, these periods must total no more than 155 days.

The rules can be relaxed if there are one or two years where it was not possible to let the property for 105 days. If the condition was met previously, it can still be treated as a furnished holiday let for the year in which it failed to meet the 105-day requirement

If you have more than one property which is used as furnished holiday accommodation, you can take an average of the days they were actually let to determine if the 105-day rule is met.

Capital allowances and reliefs

Capital allowances can be claimed on furniture and equipment used in the holiday accommodation as well as integral electrics, heating and plumbing systems. Up to £200,000 annually can be written off 100% against profits.

Reliefs are available to reduce or defer any capital gains tax (CGT) when the furnished holiday let is sold. This includes roll-over relief, gift relief and entrepreneurs’ relief, which can reduce the CGT payable for higher rate taxpayers from 28 percent to 10 percent.

Profits from furnished holiday lets are earnings for pension purposes and can allow for more tax allowable pension contributions to be made.

The recent restriction in tax relief on mortgage interest paid by residential landlords does not apply to furnished holiday lets and the full amount of any interest paid can be deducted from profits.

To gain these tax advantages, it is vital to ensure that the qualifying conditions are fully met, and the correct boxes are completed in the self-assessment tax return.

The authors of this piece were Scott Golding, manager of the AJ Chambers Essex & East Anglia division, and Philip Peters, partner at Whiting & Partners.