Pension Relief Another Plus For Holiday Lets


Simon Misiewicz

18th April 2016

Advice for property investors on tax breaks from Optimise Accountants

If you’re a savvy residential buy to let investor, you’re probably well aware of the looming tax changes that could drastically increase your tax liability. As I’ve explained in previous blogs on the 2015/6 budget announcement, the changes to the way mortgage interest relief is granted from next year will mean that higher rate taxpayers will now pay more tax on their property portfolio. In addition, the 10% wear and tear allowance has been removed.

Holiday lets tax breaks

However, there’s one sector of the letting market that has largely escaped the impact of the changes — holiday let business activities still allow mortgage interest costs to be offset against income in full, you can claim capital allowances to reduce your tax bill for the fixtures and furnishings within the property, and there’s capital gains tax relief available, thanks to roll-over relief and entrepreneurs’ relief.

I’ve previously written an article outlining the many tax breaks you can get by owning holiday lets. We’ve also written an article outlining some of the practicalities of investing in holiday lets for those weighing up the pros and cons.

Pensionable earnings 

The one thing I haven’t written about before is the fact that with holiday lets the profits count as earnings for pension purposes, whereas rental income from standard lettings does not. You can invest up to £40,000 into a pension each year (recent developments may decrease this annual allowance but we will ignore this for now) and you can get tax relief on the money you invest into a pension.

If you invest in a pension as a basic rate taxpayer then you will receive a tax credit of 20%, and if you are a higher rate taxpayer then you will receive 40% tax relief.

Let’s look at an example:

Mr A has taxable earnings from his property investments of £20,000, after his personal allowances have been taken into account. He would pay 20% tax on this amount, so £4,000. Mr A would not get any tax relief if he invested £10,000 into a pension because he only has income from residential property investments.

However, if Mr A had income from commercial properties/furnished holiday let investments, had a profit of £20,000 and invested £10,000 into a pension, then he would only pay tax on £10,000. So he’d save £2,000 in tax by putting his money into a pension scheme.

As you can see, this is yet another tax break available to those owning holiday lets/commercial properties rather than normal residential property investments.

Next steps 

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

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