Are you fed up with being targeted by HMRC for being a residential property investor? In his budget last week George Osborne made it clear he won’t be backing down on his war against buy-to-let investors, announcing that the 3% stamp duty surcharge will definitely go ahead and that while the capital gains tax (CGT) rate will be cut, this won’t apply to residential properties.
Did you know that some of the recent negative tax changes do not apply to holiday lets and serviced apartments? In fact, there are a number of tax benefits to investing in this type of business.
The problem – residential investments are taxed heavily
I have written before about the 2016 budget announcement for property investors and how it will affect residential investors. But by the looks of things, if you own a holiday let, then you’ll escape the worst of its effects, especially if you have a limited company.
Here are the headline downsides for residential property investors:
- Tax relief on mortgage interest to be limited to 20%
- Withdrawal of the 10% wear and tear allowance for furnishing your property
Now let’s compare this to holiday lets:
- Capital allowances — you can claim capital allowances on the furniture and other items that you buy for the property, which may be higher than the 10% wear and tear allowance. Accommodation is considered to be ‘furnished’ if the tenant is entitled to the use of furniture. In practice, due to the nature of holiday lettings, queries about whether the accommodation is furnished are unlikely to arise.
- Losses on holiday lets may be property losses offset against your total income (including employment income), provided the loss was due to the above capital allowances. Any claims of this nature must be made within 22 months after the year end when tax relief is given.
Capital allowances —what are they?
- tools used for maintenance
- office equipment used in running the rental business
- fixtures in a let property
Example of how to offset losses on holiday lets
Guy’s rental business makes a loss of £30,000 in 2005-06 after taking into account capital allowances. For that year Guy has net capital allowances (after deducting balancing charges) of £35,000 for his rental business. The entire loss of £30,000 is therefore eligible for what are known as ‘sideways’ loss claims for 2005-06 and 2006-07.
Guy has no rental business losses to be brought forward at 6 April, 2005. But Guy’s total relievable income for the two above years together is only £20,000 and so only relief up to this amount can be given.
The balance of Guy’s 2005-06 loss (£10,000) can be carried forward and set against later rental business profits, but not claimed sideways against general income.
Holiday lets/serviced apartments are still treated as property income for tax purposes under Schedule A of your self assessment, unless you are in a partnership or run the business through a limited company.
How a property qualifies as a holiday let/serviced apartment
For your property to qualify as a holiday let a number of qualification tests for holiday lets need to be passed. These include:
- The property must be let out on a commercial basis to make a profit
- The accommodation must be available for commercial letting to the public generally as holiday accommodation for not less than 210 days per year
- The periods for which it is let must amount (in the aggregate) to at least 105 days per year
- The property must not normally be in the same occupation for more than 31 days (known as ‘longer term occupation’). If it is, these periods do not count towards a year’s qualifying number of days, and if these ‘longer term occupation’ periods add up to more than 155 days in any year, your property will lose its holiday let status for that year
For a property that has been used as a holiday let for many years, the year will be defined as the dates the tax year runs for each period. If, however, the property is acquired, sold or has a change of use during a tax year, the year will be calculated differently according to the dates of these changes. There are also some options to average across units for those that own more than one holiday let.
CGT relief benefits
In addition to the other tax benefits, there are also capital gains tax (CGT) benefits if you have a holiday let/serviced apartment. If you sell your property, you can claim roll-over relief for commercial buildings, meaning if you buy another commercial property (such as another holiday let) intended to be used for business purposes then the CGT may be mitigated, provided that the entire capital gain is reinvested. There are a few caveats, however:
- The roll-over relief is only available to items affixed to the building rather than the furniture within
- To claim roll-over relief the property must have been used on a commercial basis (holiday let/serviced apartment) basis during the entirety of its ownership
- The roll-over relief must be claimed within four years of disposal of the asset. For example, if a disposal is made by a sole trader in 2006-07 and the consideration received is reinvested in replacement business assets in 2008-09 the time limit for a claim to roll-over relief is 5 April 2013
- To claim roll-over relief you have to use the appropriate form
Examples of roll-over relief:
An individual disposes of an asset in June 2004 for £250,000, making a gain of £100,000. In his tax return for 2004-05 he makes a declaration that he intends to reinvest the whole of the consideration in new assets for the purpose of a claim to roll-over relief.
No tax is paid on 31 January 2006 on the gain of £100,000. The relevant date by which the proceeds must be reinvested is 31 January 2009. If no valid claim to roll-over relief has been made by that date, then the individual will have to pay tax on the gain, together with interest from 31 January, 2006.
You can also claim entrepreneurs’ relief for a business that owned holiday lets/serviced apartments, whether you owned the asset in your own name or you sold/closed a limited company that owned the business.
If you gave away a residential property to your children you would have to pay CGT based on the market value, at the date of transfer, less the cost of purchase and capital items of expenditure.
However, hold-over relief may be claimed if you gift a commercial building (including a holiday let business) to someone such as a friend or family member. There is no CGT immediately payable, however the recipient will pay a higher rate upon the sale.
HMRC gives us a handy example to explain exactly how this works:
“You give an asset worth £50,000 to your brother. It cost you £17,000. The chargeable gain is therefore £33,000. If a claim is made by you and your brother, you do not have to pay tax on your chargeable gain, which is known as the ‘held-over gain’. Instead,your brother’s cost for the purposes of calculating his CGT liability on any future disposal of the asset, which would normally be its value of £50,000, is reduced by the amount of the held-over gain, £33,000, leaving a base cost of £17,000.”
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:
VAT on holiday lets / serviced accommodation
VAT however may be charged on certain rental income streams such as holiday rental / serviced accommodation letting charges, letting agency fees, property sourcing, management fees etc. You need to identify just the VATable services your business has provided and invoiced for (please note that you do not add your non VATable services such as AST rent, these are excluded) and if the last 12 months of turnover that is VATable is more than £85,000 (17/18 tax year) or if the current month your turnover on VATable services you provide is more than £85,000 (17/18 tax year) then you will need register for VAT.
You can register for VAT by completing the VAT form VAT1. Please note that if you use a book keeping software you will need to ensure that income and costs relating to the VATable services are entered with the appropriate amount of VAT (typically 20%).
Any income and costs not relating to VATable services need to be entered as VAT exempt. More can be seen about this on the HMRC website.
Each quarter you will then need to do a VAT return, which your book keeper will be able to assist you with. We can of course review the VAT return with you if that helps
If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.