Tax Considerations When Renting Out Your Holiday Home
A holiday home is a dream for many people. The idea of being able to drop everything and disappear to a second home in some beautiful part of the country has long been on many of our bucket lists for the future.
For those lucky enough to actually be able to buy their dream holiday home, the big question is often “to rent or not to rent?”
Indeed for many, the decision to rent out their holiday home is a crucial part of the financing equation in the first place.
So are there any factors to consider when renting out your holiday home? I am ignoring the potential for capital growth for these purposes – historically, UK property has risen in value steadily over the long term with the occasional sudden spurts in growth and sharp declines but that is a different consideration. For this article, I am going to focus on a few of the specific tax considerations.
Stamp duty land tax (SDLT)
Assuming your holiday home is a second property, you will need to pay the 3% higher SDLT rate for additional properties. Whatever rate would otherwise be due (including a zero rate) would have 3% added to it meaning an extra £3,000 for every £100,000 being spent to acquire your dream second home.
Local authorities have discretion about whether holiday homes are liable to full council tax. They can give furnished second homes or holiday homes a discount of up to 50% but increasingly they do not, as council budgets are increasingly being stretched. You can contact the local authority directly to find out.
Rental income is taxable and you will need to declare it on your tax return. There are a number of points to remember:
- Only net income is taxable – expenses of letting can be offset against income to calculate the taxable income. These might include advertising costs, management fees, cleaning costs, repairs and maintenance, and of course mortgage interest (though in the case of finance costs and interest there are special rules that apply to limit the deductions). Of course, if you are also using the property as a holiday home for your own use, there are proportionate restrictions on the costs you can deduct.
If your holiday home letting qualifies as a “furnished holiday let” (FHL) then special tax rules apply. The FHL rules can be complex and advice should always be sought – however, the main qualifying requirements are:
- The property must be “furnished” – that means there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture;
- You must let the property commercially with the intention to make a profit;
- The property must be available for commercial holiday letting to guests and holidaymakers for at least 210 days (30 weeks) per year and be actively promoted as such;
- If the furnished holiday let is rented out to the same person for more than 31 days, there should not be more than 155 days (22 weeks) of this type of “long term” occupation per year; and
- The property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made it available. The time either you or your family use the property is not included in this total.
If the property qualifies as an FHL, the following special tax rules may apply:
- The interest relief restrictions that apply to most landlords do not apply to FHL lets;
- Capital allowances can be claimed for any capital expenditure including furniture;
- FHL income can be included as “relevant earnings” for calculating the amount you can invest into a pension;
- An FHL property can qualify for business property relief to reduce the amount of inheritance tax that may be due on death; and
- The disposal of an FHL can potentially qualify for Business Asset Disposal Relief (BADR) to cap the amount of capital gains tax due on future disposal to the 10% rate.
Capital gains tax (CGT)
CGT will be due on any gain realised on the eventual disposal of a second home. Other than in the event the property qualifies as an FHL and meets the criteria for BADR, any gain will, after deduction of any available CGT annual exemption, be subject to tax most likely at a rate of 28% (any gain amount that falls within the basic rate band will be taxed at 18%). In the event that during its period of ownership, it was for any period your main residence, it may be possible to exempt a small part of any gain from CGT using private residence relief.
It may be tempting to consider purchasing a second home through a limited company – indeed that would in some circumstances reduce the tax exposure on any income generated particularly if the property fails to qualify as an FHL.
However, there are much wider complex issues that could arise which could remove any potential income tax saving. These include higher compliance costs, benefits in kind, and the Annual Tax on Enveloped Dwellings (ATED) as well as possible increases in the amount of SDLT due on acquisition. I have not covered these issues here but suffice to say you should seek advice before even considering taking such action.