When you’re thinking of buying a holiday let, there is much to think about, and the rules and regulations...
In terms of Capital Gains Tax (CGT), a normal residential let property is classed as an investment. However, a furnished holiday let (FHL) is classed as a business asset and will therefore potentially qualify for three CGT related 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:
You must claim your BARR within 4 years of the end of the same tax year that you bought the new asset, or when you sold the old one if this occurred after.
Gains realised 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 Entrepreneurs’ Relief (ER).
Entrepreneurs Relief is a tax relief which reduces the rate of Capital Gains Tax from either 10% or 28% to 10% on the first £10 million of lifetime gains.
To qualify for Entrepreneurs’ 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 ER 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.
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.
*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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