Are you thinking about investing in property in 2019?
Yes – then consider furnished holiday lets over standard buy to let for these five tax advantages…
1. No mortgage interest restriction
It has been well publicised that from April 2017 residential finance costs (primarily loan interest) are no longer automatically a fully tax allowable expense for buy to let investors. For higher rate taxpayers tapered restriction now applies to limit the tax relievable finance costs.
With a qualifying furnished holiday let (QFHL) these restrictions do not apply and full tax relief (up to 45%) remains available on the full finance costs relating to the purchase and improvement of the property.
2. Capital allowances available
With buy to let property businesses capital allowances are usually not available. However, with a QFHL let capital allowances can be claimed on the costs of furnishings and other items on a similar basis to a hotel or guesthouse.
When combined with a claim for annual investment allowance on integral features, this can be a very valuable allowance that is often under claimed by furnished holiday let owners.
3. Profit treated as earned income
With a standard by to let business the profit is investment income for tax purposes. However furnished holiday let profit is deemed to be earned income, which has the following advantages.
- Being earned income, joint owners (including spouses and civil partners) may choose how to allocate the profit between them. This is very useful when joint owners are taxed at differing rates.
- Those saving for retirement, their furnished holiday let profit is “relevant earned income” for pension purposes thereby increasing the amount they can contribute.
Even though the profit is earned income there is no national insurance chargeable.
4. Entrepreneurs relief available on sale transfer
Entrepreneurs relief potentially reduces the tax rate on sale of a QFHL let property from 28% down to 10%. Standard buy to let businesses do not qualify for this valuable relief.
5. Holdover and rollover reliefs available
Holdover relief
Normally when a property is gifted (for example between family members for inheritance tax planning purposes) capital gains tax is payable by reference to the market value.
With QFHL property, any gain can be ‘held over’ onto the recipient so that no tax is charged at the time of the gift.
Rollover relief
Where a QFHL property is sold and proceeds reinvested in further qualifying assets the gain can be rolled over onto the cost of the new asset thereby delaying payment of the tax until the new asset is disposed of.
Neither holdover relief nor rollover relief are available to standard buy to let businesses.
As you can see, there are considerable tax advantages available to the furnished holiday cottage owner provided they are aware of the detail and requirements to claim the relevant reliefs.