The popularity of sites like Airbnb have changed the way that people think about accommodation when they are away from home, with an increasing number opting to stay in a holiday let rather than a hotel. This has presented a growing opportunity for property investors who are looking at alternatives to a traditional buy-to-let investment.
One of the advantages of investing in a holiday let is that it has different tax considerations to a buy-to-let property, so what are some of the things investors should think about?
Jeff List, Head of Buy-to-Let at Brightstar Financial spoke to property tax specialist, Alex Bari, Tax Partner at Barnes Roffe LLP.
JL: What is the difference between a holiday let and a standard buy-to-let in the eyes of the HMRC?
AB: A furnished holiday let is treated akin to a business rather than a passive investment and as such there are many differences in the way they are taxed. So, for example, investors in a furnished holiday let are able to claim continue to claim full relief on mortgage interest payments in addition to other benefits that are not afforded to buy-to let investors. Investors in holiday lets can claim entrepreneur’s relief when they sell a property, for example, so could pay 10% rather than Capital Gains Tax at 28%. They can also rollover any gain into the cost of buying their next investment property and so do not have to realise the tax liability until they take the money out of the business.
In addition to this, investors in furnished holiday lets can also claim capital allowances on furniture, fixtures and fittings.
JL: How does a property investment qualify as a holiday?
AB: The concept is simple, the detail is perhaps a little more complicated. A furnished holiday let is closer in nature to a quasi-hotel than a ‘normal’ rental property, with numerous short-term lettings. It’s a very different proposition to a standard buy-to-let investment.
The detail is a little more complicated. In order to qualify as a holiday letting it needs to be available for lettings 210 days a year and actually let for 105 days a year.
Any period where a tenant is in the property for 31 days or more cannot be counted towards this and if the lettings exceeding 31 days is cumulatively exceed 151 days, the property cannot be classed as a holiday let.
This is looked at on a tax year basis and so it is, in principle, possible to turn a property into a holiday let business, but this is something to consider at the outset of the tax year as it may not benefit from the tax considerations further down the line.
JL: Are there any other considerations for investors?
AB: People often think that because holiday lets qualify for Entrepreneurs Relief, they will also qualify for business property relief for inheritance tax, but given recent tribunal decisions the reality is that it is unlikely that they will. However, I think the main consideration is that deciding whether or not to invest in a holiday let is not really a question of tax but of commercial appetite.
A furnished holiday let is treated akin to a trading business because it bears the hallmarks of one and so investors should be commercially prepared for the periods of no occupancy, increased costs, and extra work that can come with this.
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