Farming and the Law: So just what is a holiday let? James Skellorn explains
IS letting a holiday cottage a trading business or an investment? HM Revenue & Customs argues it is a property based investment. The many landowners who own holiday cottages beg to differ.
If holiday cottages are a trading business various tax benefits are available. To qualify as a furnished holiday let for UK tax purposes the following criteria must be met:
: : Your holiday home must be situated in the UK or European Economic Area;
: : The property must be available to be used as a holiday let to the public for at least 210 days of the year;
: : The property must be occupied with paying guests for a minimum of 105 days in the year and the rent must be market rate;
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: : The property must be fully furnished;
: : An individual let must not exceed 31 days a year.
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Favourable tax breaks apply to rental properties which qualify as furnished holiday lets. Profits may qualify for income tax relief in relation to personal pension premiums and losses may be offset against income of the same business. For Capital Gains Tax (CGT) purposes, when you sell your property, certain reliefs such as business asset roll over relief and entrepreneurs’ relief may be available. Additionally, there may be Inheritance Tax (IHT) benefits in the form of business property relief. This can reduce the IHT payable on a business interest by either 100% or 50% depending on the type of interest.
A recent case concerning the late Nicolette Pawson who before her death in 2006 owned a share in a holiday cottage has brought more clarity in relation to the application of business property relief for IHT purposes. Mrs Pawson’s cottage was rented out as a fully furnished holiday let and a certain amount of services such as cleaning were provided. HMRC had begun to take a stricter approach by scrutinising the level of services provided in relation to the application of allowing business property relief on furnished holiday lettings. The tribunal held that the level of services were sufficient for the letting of the property to amount to a business and business property relief was allowed.
It should be noted that although this is a welcome result for owners of furnished holiday lettings, it was a generous result for the taxpayer. Owners should be aware that HMRC will consider every case on an individual basis, based on its own particular facts and merits, before business property relief will be allowed. It is still good news for owners of furnished holiday lets as there are still many benefits for Income Tax, CGT and IHT purposes of owning a furnished holiday let.
: : James Skellorn is a partner and head of the private client team at Barker Gotelee Solicitors.