Firstly, let us gain an understanding of how a Furnished Holiday Home differs to a normal buy to let property investment:
- It can be a static mobile home i.e. a “caravan”
- A purpose built holiday home (we are seeing many more of these sites being built – no tax for tax mitigation)
- A normal residential property can be bought and then run as a holiday home. Must be fully furnished
- Must let property for 105 Days
- Must be available for let for 210 Days
- Cannot let for longer term lets of more than 155 days during the year
- Must be in the European Economic Area
Comparing the Tax Benefits
The ability to write down depreciation of the assets against income tax
- Buy to Let: No, only running expenses
- Furnished Holiday Let: Yes. This is attractive as an additional expense when capital spend/make improvement you make plus normal running expenses
The ability to use Business Property Relief (BPR) i.e. pass on the asset free of inheritance tax.
- Buy to Let: Inheritance Tax may be payable as it is not a business
- Furnished Holiday Let: It is a business asset, can claim 100% BPR i.e. No inheritance tax payable
Income Tax (CGT)
Profits on rents after running expenses are taxable
- Buy to Let: Yes, payable
- Furnished Holiday Let: Yes, payable
Capital Gains Tax
Payable on both types of property (after allowances).
- Buy to let: Yes, payable at 18% (basic rate taxpayers) and 28% (higher rate tax payers)
- Furnished Holiday Let: May benefit from Entrepreneurs’ Relief when selling your holiday let as it is as a business asset. CGT on business assets is 10% for the first £1m of gains rather than 18%-28%.
- Roll-over Relief: May be able sell your furnished holiday home and roll over capital gains into another “business” furnished holiday let and not pay capital gains tax
Buy to let: Tenant will pay
Furnished Holiday Let: off settable as an expense apart from periods of longer term let
What to watch out for
In a recent test case Pawson (deceased) v HMRC , HMRC attempted to block 100% business property relief on the property claiming that no service was being provided by Pawson. In short, it was not being run as a service business holiday home. A Tribunal overruled HMRC sighting the regular turnover of guests, on-going services for cleaning, bedclothes, television, telephone etc. in the cottage made it a holiday business allowing BPR and not an investment subject to IHT.