Holiday Homes – tax issues

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There are a number of tax aspects to buying a holiday home.  The main distinction is whether you plan to let it out or only use it for your own use with unpaid use by friends or relatives.

If the house is for your own use, with no rents received, then the tax position is fairly simple.  You will get no tax relief on the interest on your second mortgage, or extension of your first.  You can claim no tax relief on any of the costs of having the second property. No tax responsibilities on a year-by-year basis.

Tax will be due if you make a capital gain when you dispose of the property.  In other words if you sell the property for more than it cost you then there is probably a capital gain. (If the home is abroad be aware you may have taxes to pay in the overseas country.  If so the UK may allow you some credit for those against UK CGT.)

If your capital gains are more than the annual exemption (£10,900 in 2013/14) then there will be capital gains tax to pay.

To reduce the risk of this it may be worthwhile buying the house in joint names.  This means that any gains can benefit from two annual exemptions. Tax of over £4,000 could be saved.

Let me now assume you want to let out the property.  Some casual lettings will be taxable but there are expenses you can set against the rent.  These include rates, electricity, heating etc. – but only a fair proportion based on the amount of weeks the property was let.  You can also claim a similar proportion of the interest paid on any loan to buy the property.  Also interest on your main mortgage if you extended it to buy the holiday home which is let out.

A loss would occur if the expenses are more than the income.  This is carried forward and set against the next year’s income from rental. You cannot set the loss against your other income.

If you meet some strict tests your letting might qualify as “furnished holiday lettings”.  If you meet them then a loss could be set against your other income.  This could produce a tax refund.

The tests have been changed for 2011/12 on, and now are:

  1. Available for commercial letting at least 210 days a year.
  2. Actually let commercially as holiday accommodation at least 105 days in the tax year.
  3. Lettings for more than 31 days (called ‘longer term occupation’) to same people must not make up more than 155 days per tax year.

Huston’s Hint

If you can meet the strict Furnished Holiday Lettings and make a loss this can be set against your other income, say from work or business, to produce a tax saving.