Council Tax

The amount of council tax you will be required to pay on your holiday let property will depend very much on the area your property is in and the authority it is under. In some areas, owners of second properties are allowed the luxury of a 50 per cent reduction in council tax, while others are required to pay 90 per cent of the full cost.

Whatever the charge, you will need to make sure that you have sufficient funds to pay this tax. You will be required to pay council tax every month, regardless of whether your property is being let or not.

At the time of writing, if your investment property is available for holiday letting for 19 weeks or fewer per annum, you will be required to pay council tax. If it is available for letting for 20 weeks or more per annum, you will be required to pay business rates.

If your property is in an area where council tax on second homes is high, or has recently been increased, you will probably benefit from paying business rates as these often work out cheaper, and in some cases councils are granting 50 per cent small business relief. In order to qualify for business rates your property must be available to rent for a minimum of 20 weeks per annum, otherwise you will fail the Inland Revenue’s tests and will not be eligible to be treated as a business and thereby lose out on a huge amount of valuable tax breaks.

Value added tax

The threshold for VAT is currently £60,000. If you have several properties available for letting, you may well breach this threshold. However, if you are only intending to buy and let one property, it is highly unlikely that you will exceed the £60,000 limit.

It is vital that you seek the advice of an accountant if you are in any doubt whatsoever about the implications of VAT on your property.

Capital gains tax

When you sell a property, which is not your family home or principal private residence, then in general you will be liable to pay capital gains tax on it. However, nothing is ever simple when it comes to taxation and the situation can change from one year to the next and each individual Person’s tax position can be very different., You would be well advised to seek the advice of an accountant for clarification of your own personal position and liabilities.

Although at the present time, capital gains tax is payable on investment property which is not your principal private residence, there are still ways of reducing your liability. It is vital that you ensure that you enjoy your annual exemption limit, which doubles for a married couple, if the property is in joint names. Unmarried couples can choose a main residence each and benefit from the annual allowance this way. You may be eligible for additional relief if the investment property has ever been used as your main residence.

Inheritance tax

Properties that are used solely for holiday letting will probably qualify as business assets with regard to inheritance tax. At present (2006/7), inheritance tax is charged at 40 per cent on the amount of the estate valued over £285,000; however, if the property qualifies for exclusion through being a business asset, then the relief is 100%. Although it is not a guarantee that all holiday letting properties are excluded from business asset relief, the Inland Revenue Advanced Practice Manual suggests that where a property qualifies as a business, relief should be granted.

Taxable profit

If you own a property in the United Kingdom which you let out, you can deduct certain expenses and tax allowances from your rental income in order to work out your taxable profit, or indeed loss. If you own several letting properties, you can pool the income and expenses together.

If your property keeps to the ‘rules;’ listed below, which are known as ‘qualifying test’s, then the rental income you receive from your holiday home in the United Kingdom may be treated differently, for the purposes of tax, to other rental income.

In order for your property to qualify as a ‘holiday let’, it must:

• 1.Be in the United Kingdom.
• 2.Be fully furnished.
• 3.Be available for holiday letting to the public for a minimum of 140 days per annum.
• 4.Be actually let as a holiday home for at least 70 days per annum. To qualify these lets must be commercial lets and not rented at cheap rates for friends or family.
• 5.Be let on a short-term basis of not more than 31 consecutive days. You will not be able to let the property to the same person for more than 31 days per annum.
• 6.Be let as a holiday home for a period of at least seven months per annum.

It is worth knowing that if you meet all the above qualifying tests in a seven-month period of each year, there are no restrictions on longer lets for the remaining five-month period. You will be able to let your property for whatever length of time you wish in the remainder of the year. However, you must be aware that these lets, if over 31 days, will not count as holiday lets.

Allowable expenses

When owning a holiday let property it is vital that you are aware of the numerous expense allowances you will be able to claim against tax.

Generally, it is true to say that if the expenditure is wholly or exclusively for the purpose of the holiday let business, it is likely to be a an allowable expense for tax purposes. Holiday letting demands a good deal of management and therefore a realistic amount for wages can be claimed.

The usual allowable expenses for a holiday let property are as follows:

Capital allowances

Capital allowances cover the depreciation of furnishings and other assets purchased, excluding vehicles. Kitchen and bathroom fittings and heating systems are included in any capital allowance.

Capital expenditure on certain items also qualifies for capital allowances. These items include:

White goods and electrical equipment

Furniture

Carpets and floor coverings

Ornaments

Pictures

Garden furniture and equipment

In addition to the above, expenditure on the following also qualifies for capital allowances:

The installation of fitted kitchens

The installation of fitted bathrooms

Central heating

Forty per cent of the cost of these assets can be claimed in the first year only, with normal capital allowances of 25 per cent for second and subsequent years. For examples:

It is extremely important that you are aware of the capital allowances you can claim against your holiday letting income. The availability of this allowance can make it possible to turn a profit – on which you will pay tax – to a loss – on which tax refunds may be available.

Working out your taxable profit or loss

The profit or loss you make on your holiday let property is worked out in much the same way as any other rental income. However, on a holiday let property you will be able to claim capital allowances rather than the usual wear and tear allowance. The previous list gives examples of expenses which will qualify for capital allowances.

There are certain financial records you will need to keep relating to your holiday let business. These records should include:

• 1.The amount of rental income you have received during the year.
• 2.A list of your allowable expenses.
• 3.Details of your capital costs.

Rental Income You will need to keep a written record of the dates you have let your property and the rents you have charge.

Allowable Expenses You will need to keep a written record detailing all the costs you have incurred in letting and managing your rental property. The allowable expenses you claim will reduce the amount of taxable profit you make. A detailed list of allowable expenses is given earlier in this chapter and they will include things such as buildings and contents insurance, maintenance and repair costs, utility bills, council tax, agency letting fees, etc.

Capital Costs You will be able to reduce your taxable profit by claiming certain allowances for ‘capital costs’. These include the cost of the furniture and equipment you provide in your property.

If you employ an agency to let your property, you will receive a detailed statement of the rental income you have made. You should keep all of these statements, together with a log of your allowable and capital expenses showing which items you have purchased, when you purchased them and how much you paid. Keep all your receipts.

If you are letting the property yourself, you must be extra vigilant when it comes to recording the rental income you have received. Make sure you keep a rent book showing the dates your property is let and the income you have received. Again, ensure you keep all receipts and invoices and keep your business expenses separate from your personal expenses.

You will need to declare the money you make from your furnished holiday property. You can do this by completing the land and property pages of your Self Assessment tax return. If you own more than one letting property in the United Kingdom, and your total income from all the properties in under £15,000 per annum before expenses, then you can group the expenses together as a single total on your tax return. If the amount is over £15,000 you will be required to provide separate detailed information for each property along with a full tax return.

You will need to keep all your property let records for six years after the tax year in which they apply.

Profit or loss?

A crucial difference between holiday letting and long-term letting is shown clearly with regard to profit and loss on the business. If a holiday let business is operated as a husband and wife partnership, you will be able to maximise your tax liabilities by allocating profits to the lower earner. In much the same way, if a loss is incurred this can be allocated to the highest earner’s income, which will in turn maximise the tax refunds available.

In the case of a holiday let, losses can be offset against other income to obtain tax refunds or they can be carried forward to use against future profits. If a loss is incurred in the first four years of a holiday let business, you would be able to carry the loss back three years. For example, a loss suffered in the year 5 April 2005 could be offset against the income earned in 2001/2002. This could be a crucial benefit in the earnings were higher in the earlier years.

Another advantage of holiday letting is that where profits are earned, tax, liabilities can be reduced (and future pension benefits increased) by the facility to increase pension premiums because the profit is treated as income for pension purposes.

While it is important to be aware of the numerous benefits available for a holiday let business, it must also be remembered that you should be setting up your business with a view to making a profit. If your business does not succeed, at some point, in making a profit, it will fail to meet the tests enabling it to be treated favourably for tax purposes. For this reason it is important that you consider, from the outset, what your aims are, and that you prepare a brief business plan to support your business should there be any queries on this matter by the Inland Revenue.