By Stephen Metcalf - Private Client Tax Senior Manager at Kreston Reeves
Much has been written in the property press over the summer to persuade us of the benefits of owning a holiday home, especially those of us who live in crowded cities looking for a bolthole. Increasingly, people are showing interest in buying property to create furnished holiday lets (FHL) for longer term investments, so could this be the next property bandwagon which everyone will jump onto?
As any professional landlord knows, it is always worth reviewing your wider property portfolio to see whether it can be structured more effectively, and this could mean exploring other investment opportunities. So could furnished holiday lets play a more significant and effective role in a property portfolio?
The answer could well be yes; it is something certainly worth considering, especially given the favourable tax treatment afforded to qualifying investments. Currently, there is no requirement for a FHL to be in a typical holiday location, and with the rise in popularity of Airbnb, people are looking to stay anywhere and at any time of the year.
To qualify under the current tax rules, a FHL must be available to let to the public for 210 days and let for a minimum of 105 days over the course of a year and only on short term lets (less than 31 days). That means you or your family could use the property for your own use outside of this period. Alternatively it might be possible to finder a longer term let in the period of up to 155 days (ensuring the property is available for short term holiday lets for at least 210 days). It is also worth noting that your FHL can also be anywhere in the European Union. However, with Brexit, this arrangement may change and should be watched with caution.
If you convert some of your existing properties into FHL and the time comes to sell them, you may be able to claim entrepreneurs’ relief, to reduce the rate of capital gains tax to 10% instead of 28%.
The cost of furnishings - including furniture, white goods and moveable items - for a FHL can also be deducted for tax purposes against rental profits under the capital allowances regime.
Following the changes which came into effect on 6 April 2017 (at least in part), which restricts the amount of mortgage interest relief which can be claimed on a buy to let property to the basic rate, there could be properties in your existing portfolio that you might want to turn into a FHL. If you are a higher rate or additional rate tax payer, then furnished holiday lets still benefit from mortgage relief of 40 or 45%.
Many landlords have been asking how they can be more tax efficient since the 6 April changes to Mortgage Interest Relief, and there has been a focus for some on incorporating the properties into a Limited company. This isn’t simple and doesn’t work for everyone. There are a number of potentially expensive pitfalls to watch out for, so it is important that good advice is taken.
Another point to consider in respect of mortgage interest is just how much you are claiming by reference to the value of properties. Sometimes landlords may take out loans or extend their mortgages (even if connected to their home mortgage) to repair properties, refurbish etc, which might be missed when considering the claim. This might well soften the blow, if extra interest can be claimed that perhaps hasn’t been, and there is the possibility to amend recent tax returns to claim a refund.
There is of course the fear that FHLs will fall under HMRC’s scrutiny to the same extent as BTL in the future and significant tax changes made. It is, however, worth noting that these types of letting are viewed differently, with a FHL considered a trading business whereas a BTL is considered an investment business.
There are, of course, downsides to having a FHL, most notable that there is much more work to do than with a traditional BTL, having to be more hands on due to the frequency of change overs, running bookings, marketing and dealing with online traveller feedback.
For specialist tax advice pleasecontact Kreston Reeves