Damage deposits are a major factor when considering turning your second home into a holiday let. Damage to properties...
Capital Gains Tax (CGT) is a tax that is taken from the profit that you make when you sell an asset for a higher amount than you initially bought it for. Assets that you may be charged Capital Gains Tax on may include valuable personal possessions, business assets and property.
When you are considering selling a property, Capital Gains Tax is something that you must account for. However, a furnished holiday let (FHL) is classed as a business asset and will therefore potentially qualify for three types of Capital Gains Tax reliefs:
Properties that qualify as furnished holiday lets may also benefit from Business Asset Rollover Relief (BARR), under section 152 of the Taxation of Chargeable Gains Act 1992.
Business Asset Rollover Relief, or, BARR, is available where the proceeds of one business asset (a furnished holiday let), in full, or in part, are reinvested in another business asset. In these circumstances, the gain on the disposal of the first asset can be rolled over until the replacement business asset is sold.
As a result, you delay paying Capital Gains Tax if you sell or use all or part of your proceeds to buy a new business asset. You may then need to pay tax on the gain from the original asset.
With Business Asset Rollover Relief, you can also claim:
In some circumstances, you can also claim partial relief. These include:
To claim your BARR, you must complete the form found within the HS290 Business asset rollover relief HMRC help sheet and submit it along with your self assessment tax return.
You must claim your Business Asset Rollover Relief within four years of the end of the tax year that you purchased your new asset, or from when you sold the original asset if this occurred after.
When you sell or ‘dispose of’ all or part of your business, you may be able to pay less Capital Gains Tax.
Gains on the sale of a buy-to-let residential property will ordinarily be subject to Capital Gains Tax at rates of 18% (basic rate taxpayers) or 28% (higher rate taxpayers).
However, furnished holiday lets are treated as business assets, and therefore have the potential to qualify for Business Asset Disposal Relief.
Previously known as Entrepreneurs Relief, Business Asset Disposal Relief (BADR) is a tax relief scheme which reduces the rate of Capital Gains Tax.
You’ll pay 10% on all gains on qualifying assets under the Business Asset Disposal Relief scheme.
To qualify for Business Asset Disposal Relief, both of the following must apply for at least 2 years up to the date that you sell your business:
You can qualify for BADR when:
The same conditions also apply if you’re closing your business. You must also dispose of your business assets within 3 years to qualify for relief. If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.
You can work out how much you could save through Business Asset Disposal Relief here.
Gift Hold-Over Relief may be available to furnished holiday let owners if you give away your holiday home, or sell it for less than it’s worth to help the buyer.
Gifts are often treated as deemed disposals for the purposes of Capital Gains Tax, meaning that the gift of a normal buy-to-let property by an individual could trigger a significant CGT liability in the hands of the person transferring.
However, a furnished holiday let as a business asset can benefit from Business Asset Hold-Over Relief, under section 165 of the Taxation of Chargeable Gains Act 1992. Instead of stamping the Capital Gains Tax liability at the date of the gift, the capital gain can be held over until the recipient of the gift disposes of the property.
Any claim for Gift Hold-Over Relief must be made by both the person transferring and the person receiving the transfer, except in the case of trusts.
With Gift Hold-Over Relief, you won’t need to pay CGT when giving the assets away. This means that the person who receives the assets must pay any CGT that is due when they sell them on.
Furnished holiday let businesses are unlikely to qualify for Business Property Relief, for Inheritance Tax purposes. As a result of this, Gift Hold-Over Relief is a useful planning tool which allows individuals to pass value down the generations in a tax-efficient manner.
* At the time of updating (18th November 2021), Sykes Cottages has taken all reasonable care to ensure that the information contained in this article is accurate. However, no warranty or representation is given that the information is complete or free from errors or inaccuracies. Generic information is contained within this article and each individual’s tax affairs are different, further advice should be sought from an accountant.
*Information partly provided by Innes Reid, a Chester financial advice firm offering independent guidance for both private and corporate clients.
*Based on a 7 bedroom property in the Lake District with bookings between October 2017 to September 2018.
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