21st August 2019
EXPERT EXPLAINS WHY THE TAX RULES RELATED TO HOLIDAY PROPERTY CAN BE VERY BENEFICIAL
In the aftermath of UK buy-to-let landlords exiting the residential property sector in their thousands - largely due to unfavourable, government-imposed cuts and conditions - many property industry specialists have turned their attention to furnished holiday properties. The legitimate tax benefits available to those who purchase furnished holiday properties is highly attractive to investors. A capital allowances expert has lifted the lid on this misunderstood subject.
Andrew Stanley is the managing director of Stanley Tax Associates, one of the UK’s largest independent specialist property tax advisers, focusing on capital allowances. He says: “There are a huge amount of tax benefits when you shift from buy-to-lets to short-term letting.
“One of the drivers for investors has been the loss of the deductibility of the bulk of their mortgage interest. That hasn’t had any impact on furnished holiday lets.
“When you’re investing in these sorts of properties, you can still retain the deductible allowance rather than potentially paying tax on turnover on a buy-to-let. There’s a whole myriad of tax positives, compared to more standard investing.”
What specific type of accommodation qualifies?
Stanley explains: “Furnished holiday let (FHL) is a tax term which covers a whole host of different types of activities linked to short-term letting of residential property.
“It’s a bit of a misnomer as it doesn’t actually have to be holiday-related. We’ve actually done a huge number of holiday lets in Croydon and I don’t think anyone is actually going on holiday there!
“They tend to be for key workers, members of the police force and so forth who are wanting short-let property. It is actually defined by quite a tight criteria in tax legislation.”
Occupancy is key
Stanley advises that the main criteria relates to occupancy. “For a property to be classed as an FHL for tax purposes, it has to be available for short lettings and a short let is 31 days or less,” he says.
“It has to be available for this type of letting for at least 210 days in the year. That eliminates the ability to put someone in there on a six-month contract or even live in it yourself for six months.
“Broadly speaking, it has to be available for most of the year. It then actually needs to be let for half of this time, as a minimum. That means for at least 105 days, with periods never exceeding 31 days. It does also need to be furnished.”
Stanley says there is often confusion surrounding the status of a property as an FHL, pointing out that it is not down to the owner to decide when the property is classed in this way. “There is a widely held misconception that you can choose to be a furnished holiday let but, if you hit that criteria, you are a furnished holiday let rather than a normal property business.”
Options available if occupancy rates are not achieved
There are a couple of options available if low occupancy rates mean that the property does not continue to meet the criteria for a furnished holiday let. “If you have a portfolio of furnished holiday lets, you can make an averaging election to smooth out good performance with bad,” says Stanley. “If you’ve got another building that’s far exceeded the requirement, you can average out between the two to make all of them qualify.
“If you only have the one, or averaging wouldn’t work, you can actually make what’s called a ‘period of grace’ election, as long as the property had already qualified as a furnished holiday let in the past. This effectively is a ‘get out of jail free card’ for that year and you can even use it for a second year.”
Could this be viewed as a tax loophole?
Some investors assume that those who profit from the tax benefits associated with furnished holiday lets are merely taking advantage of a loophole, but Stanley is keen to stress that is not the case. “Our job is the same as a HMRC inspector’s job, in that we are here to make certain our clients are paying the correct amount of tax.
“If there is a relief that you are entitled to claim, on money that you have already spent or are going to spend, it’s a bit barmy not to claim it. It’s a bit like waiving your personal allowance on income tax just to be on the safe side.
“Some people, when we first speak to them, are concerned about stories in the press regarding off-shore companies but it’s a very different kettle of fish.”
What are the particular capital allowances?
Identifying the particular capital allowances, Stanley says: “The main value is in the utility infrastructure in the property, so we’re talking about things like the electrics, plumbing, heating, air conditioning in a larger building and white goods.
“Also, because the ambience of the place is critical – by looking nice, people want to stay – a lot of the finishes are available as well, so things like fitted carpets, door furniture, pictures screwed to the wall and so forth.
“When you move from being a passive buy-to-let investor into furnished holiday lettings, you’re treated much more like a trade than a simple investment business. It’s a lot more hands-on than simply signing a one-year assured tenancy agreement. We are seeing a huge growth in this area and it’s a massive benefit for investors to be able to tap in to this value.”
Aria Resorts CEO welcomes greater understanding of tax benefits
Iain Brown is the chief executive of Aria Resorts, who provide secure property investment as a supplier of holiday homes. He welcomes a greater understanding of the tax benefits associated with furnished holiday lets, as this is a key factor which is very often overlooked.
"We know from the holiday property purchase and investment inquiries we receive at Aria Resorts, only a small percentage of our prospects are aware of the favourable HMRC tax rules for holiday property lets,” said Brown.
"Aria Resorts takes the subject of compliance very seriously. It's important that our customers are aware of all of the benefits linked to a holiday property purchase. We therefore strongly recommend independent experts like Andrew Stanley to provide the qualified advice." added Brown
If you would like to listen to the full interview with Andrew Stanley, please access our Google Aria Resorts Investments Podcasts