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Property Tax Portal by Arthur Weller & Amer Siddiq Arthur Weller and Amer Siddiq outline the conditions and tax treatment for furnished holiday lettings.IntroductionIf you let a property in a popular holiday location, e.g., the south coast, then you could well be operating a holiday lettings business. This is especially the case if your target market is people visiting and staying in your property for short periods of time.Qualifying Criteria for a Holiday LetIn order to qualify your property as a holiday let, it must be fully furnished; that is, anyone moving into the property must be able to live out of the property without having to buy any additional furniture/furnishings.It must also satisfy the following three conditions: • the property must be available to let to the public on a commercial basis for at least 140 days; • the property must be let for at least 70 days; • the property must not be occupied by the same individual for more than 31 consecutive days during at least 7 months of the year, which need not be continuous but which includes any months containing any of the 70 let days. If you have more than one property let for holiday lets, then it is not necessary for each property to actually be let for at least 70 days (in order to meet the 70 day rule), provided that each property meets the 140 day and seven month rules. You may claim averaging treatment in order to satisfy the ‘actual lettings’ test. Case Study 1John lets four holiday cottages, and all would otherwise qualify as furnished holiday lettings.The actual lettings periods are:
288 days divided by four cottages = 72 days. By averaging all four, all will qualify. Without averaging, cottage 4 wouldn’t qualify. The averaging claim must be made within 22 months of the end of the tax year to which it relates. In practice, the claim is likely to be made by your tax consultant when completing your tax return for the year. Calculating Income Tax on your Holiday LetIncome tax on a holiday let is charged in the same way as if you are operating a normal lettings business, where tax will be liable on any rental profits less expenses.Case Study 2John buys a three-bedroom property in Bournemouth. His investment strategy is to rent the property in the summer periods to visiting holiday makers.He offers the property for £250 per week. Over the financial year, it is let for 35 weeks, which means that he has received a total rental income of £8,750. His expenses are £2,750. This means that he is liable to pay tax on the £6,000 profit. Three Generous Tax Benefits Associated With Holiday LetsOperating a holiday letting business has three significant tax benefits. These are detailed below.Offsetting losses against other incomeIf you are unfortunate enough to make a loss in your holiday lettings business, then the loss is treated as a trading loss and can be offset against any other source of income that you have, in the same way as trading losses.Case Study 3Kiran buys a property for the purpose of holiday letting for £130,000 in 1995.Her first year of letting is very tough and she makes a £2,500 rental loss. However because she is employed with a salary of £35,000, she is able to offset the loss against this income. In other words she pays less tax on her employment income. Re-investment of capital gainsIf you decide to sell your holiday let and make a capital gain, then the profit can be re-invested into another qualifying asset, thus avoiding any immediate capital gains tax liability. This therefore means that you will not liable to pay any capital gains tax until you dispose of the asset you have re-invested in.However, you can continue selling and re-investing the profits. By doing this, you will continue to defer any tax liability until the point at which you stop re-investing the profit. Case Study 4Continuing from the previous example.Kiran sells her property 5 years later for £230,000, thus meaning she has made a profit of £100,000. She buys another ‘holiday let’ property in the same tax year by re-investing the profits from the sale and therefore is able to defer any CGT liability. Business asset taper reliefBecause a holiday let property is classed as a business asset, you can claim business asset taper relief. This is more generous relief than non–business asset taper relief.Arthur Weller and Amer Siddiq The above article is reproduced courtesy of Property Tax Portal. For property tax savings tips, secrets and strategies, click here
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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Article Added Saturday, 30 December 2006 | 3207 Hits |
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