Furnished holiday lettings qualify for tax benefits, says Nick Braun of TaxCafe

ANYONE WHO INVESTS IN COMMERCIAL PROPERTY will probably know that it is treated 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%.

Commercial property qualifies for ‘business asset taper relief’, which means 75% of your profits are tax free. To qualify, you have to have owned the property for at least two years and rent it out to a qualifying business.

When you qualify for full business asset taper relief, your 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 when you 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.

I’m talking about investment in ‘furnished holiday lettings’, such as holiday cottages in Cornwall and flats in popular tourist destinations such as London and Edinburgh.

BREAK POINT

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 they will tell you that many of their clients are sitting on rental losses. Even if you invest in property with a high rental yield, once you lop off mortgage interest, agents’ fees, repair costs and wear and tear, most buy-to-let investors are in the red.

These losses cannot be deducted from your other taxable income, such as your salary. Instead they have to be carried forward year after year until you 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 fl of losses is fl of salary or other income on which you don’t have to pay any Income Tax.

Rollover Relief:

Furnished holiday lettings are the only type of residential property that 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 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 involved with the holidaymakers’ activities.

To qualify as ‘furnished holiday lettings’, 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 ‘mates’ rates’
- Actually let for at least 70 days a year
- Not occupied for more than 31 days by the same person in any seven-month period.

Although the property doesn’t have to be in a recognised holiday area, the lettings must be to holidaymakers and tourists to qualify.

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 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.

This article originally appeared in Property Week 12 May 2006 and was supplied to LandlordZONE by Nick Braun the founder of tax guide publisher Taxcafe.co.uk ©TaxCafe