The Enormous Tax Benefits of Furnished Holiday Lettings
Anyone who invests in commercial property will probably know that it is treated very generously by the taxman.
For example, a couple who make a profit of £100,000 selling a shop could end up with a tax bill of just over £1,000 – meaning they pay tax at a rate of just over 1%!This remarkable result comes about because commercial property qualifies for the rather unfortunately named 'business asset taper relief'. However, don't let the ugly name put you off. (After all, you wouldn't mind taking someone called Britney home to meet your parents, provided she looked like a goddess.)
Qualifying for full business asset taper relief means 75% of your profits are totally tax free. To qualify you have to own the property for at least two years and rent it out to a 'qualifying' business throughout your ownership. Most trading business tenants will qualify, except for quoted tenants (Marks & Sparks and the like).
When you qualify for full business asset taper relief, your absolute maximum tax rate is 10% but rates as low as 1% or even 0% can be achieved if you sell the property in a year in which you (and preferably your spouse) have very little other income or capital gains.
Compare that with most residential property which only qualifies for the more stingy non-business taper relief which only shelters 40% of your profits after 10 years.
Some commercial property may get off lightly when it comes to capital gains tax but there is one type of residential property that also qualifies for business asset taper relief... plus a host of other tax reliefs which most other property investors can only dream about.
I'm talking about investment in 'furnished holiday lettings' which are the property tax equivalent of winning the lottery.
Here we're talking about the likes of holiday cottages in Cornwall but also flats in popular tourist destinations such as London and Edinburgh.
Apart from business asset taper relief, furnished holiday lettings also qualify for the following tax breaks:
Loss relief. Ask any accountant who prepares tax returns and he will tell you that many of his clients are sitting on rental losses. Even if you invest in property with a high rental yield, once you lop off mortgage interest, agent's fees, repair costs and wear and tear most buy-to-let investors are in the red.
The problem with these losses is they cannot be deducted from your other taxable income, such as your salary. Instead they have to be carried forward year after year until you eventually have some rental profits to set them off against. For many investors such losses are therefore largely worthless.
Furnished holiday lettings are an exception, however, because you can offset your rental losses against your other income . Why is this so attractive? Because every £1 of loss is £1 of salary or other income on which you don't have to pay any income tax.
Rollover relief. Furnished holiday lettings are almost the only type of property investment which allow an investor to sell one property and postpone capital gains tax by investing in another. This relief allows you to sell properties in areas that are underperforming and seek out new properties in up and coming 'hotspots', without fear of losing a big chunk of your profits to the taxman.
A furnished holiday letting business may also be exempt from inheritance tax where the lettings are short-term and the owner is substantially involved with the holidaymakers' activities.
To qualify as 'furnished holiday lettings' there are quite a few hoops through which you have to jump. For example, the property has to be:
- Situated in the UK
- Furnished
- Available for letting to holidaymakers for at least 140 days a year (these must be proper commercial lets, not discounted rates for your mates)
- Actually let for at least 70 days
- Not occupied for more than 31 days by the same person in any 7 month period.
Although the property doesn't have to be in a recognised holiday area, the lettings must be to holidaymakers and tourists in order to qualify.
The added cherry on top is that there is nothing to stop you from using the property occasionally, although this will reduce the income tax and capital gains tax reliefs you can claim. You must also ensure that, taken as a whole, the property remains a commercially viable, i.e. profitable, proposition in the long run.
Of course many commercial property investors would wince at the idea of letting a property for just one month, especially those sitting on cushy 20 year leases to Government departments and the like! And, of course, you should never let the tax tail wag the investment dog.
Nevertheless there is a thriving market in UK holiday properties and many investors are unaware of the tax benefits.
And if you choose a nice enough place, you may even be able to persuade Britney to come and stay.
