| Bearing
in mind the generally wet UK Summers, a review of the tax
efficiency of UK property let to holiday makers might seem
a joke article but think of all those campers looking for
a warm bathroom and central heating...
Income from furnished lets is taxable under
schedule A, unless the landlord is in occupation and provides
services beyond those usually provided by a landlord, in which
case Schedule D, Case I may apply.
Furnished holiday lets, however, can be treated
as a trade, if certain conditions are met, to achieve beneficial
loss relief, business asset taper relief (BATR), capital allowances,
and other allowances that cannot be achieved under Schedule
A. To benefit, the property must be available for commercial
letting as holiday accommodation for at least 140 days a year
and actually let for at least 70. It must not be in the same
occupation for a continuous period of more than 31 days for
at least seven months in any twelve-month period. If these
conditions are met, the letting of furnished holiday lets
(FHLs) is treated as a trade for tax purposes.
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Wear and tear allowances cannot be claimed
in respect of holiday lets where capital allowances are available.
If a house is let long-term, however, expenditure on furniture
and fixtures qualifies for wear and tear allowances. Wear
and tear is calculated on 10% of the rents, less any expense
that the landlord meets that would normally be paid by a tenant
(such as council tax).
The wear and tear allowance is meant to cover
furniture and fixtures that, in unfurnished lodgings, a tenant
would provide (e.g. cookers, washing machines, etc.) It only
applies to residential property that is furnished in such
a way that the tenant does not have to provide any furnishings.
Instead of wear and tear, the cost of renewing
furnishings can be claimed, as long as there is no deduction
of the original expenditure, no claim is made for any cost
of any improvement when the old asset is discarded. The landlord
can also claim the cost of renewing fixtures that are not
usually removed if a property is vacated or sold (e.g. baths,
toilets, etc.)
The standard rate of VAT applies to rents
for holiday lets as long as they are advertised as such. If
they are offered at lower rates in the off season, they can
be treated as residential accommodation if they are let for
that purpose for more than four weeks and the property is
clearly situated in a resort where trade is clearly seasonal.
Thus a VAT-registered sole trader owning
a holiday cottage will have to charge output VAT on their
VAT Return BUT will be able to claim input VAT on repairs
and related costs. If high expenditure on the holiday let
is planned, then the organisation of the ownership of the
property to come within the scope of VAT can be considered
as a tax planning exercise.
Two or three FHL properties would clearly
cause turnover to rise above the VAT registration limit.
During the winter months, it might be difficult to attract
holidaymakers to traditional tourist locations and short-term
lets for less than five months can be considered as income
efficient without disturbing the FHL status. However, this
could jeopardise the IHT position.
It is important that clients who own holiday
cottages should try and ensure, as far as possible, that they
qualify for inheritance tax (IHT) relief. With property prices
appearing to be permanently on the increase, the need to shelter
these assets from inheritance tax is greater than ever and
should be planned accordingly.
Buy-to-Let
Property Investment in Spain | Legal
Check List for Buying a Property in Spain |
Choosing
a holiday let property | Tax
on UK holiday lettings | Expenses
and allowances on income from property |
Tax
Efficient UK Furnished Holiday Lets |
