January is the time when many of us have taxes to pay, so our attention naturally turns to ways we can reduce that tax in the future.

And there are many different ways you might be able to reduce your tax liabilities. There are lots of rules and regulations, lots of schemes and designations, lots of nuances in the tax codes that you may be able to take advantage of.

Many of our rural clients own additional properties that they rent out as an income source. If you have a converted barn or a second farmhouse that you rent, there may be opportunities for you to reduce the tax you pay.

Determine how you are renting the property

The way in which a property is rented will determine which tax breaks you may be eligible for. There are different options depending on whether a property is leased long term or if it’s used as a holiday let.

So the first thing you need to do is be clear on what the property is used for. If you’re leasing it out to tenants who live in it on a long-term basis – for longer than 155 days – then it’s classed as a rental property – a second home that you own, that’s leased to others.

But if you let the property out to different guests for short period of times – as a holiday home – then you could declare the property as a furnished holiday let.

The requirements for a Furnished Holiday Let (FHL).

If you’d like to declare your property as a Furnished Holiday Let, it must meet a few conditions:

• It should be in the UK or EEA
• Furnished to a standard where it’s liveable
• Guests must have access to use the furniture during their stay
• Available to the general public at least 210 days a year (excluding days where it’s used by the owner)
• Let out to members of the public for at least 105 days, during that same 12-month period
• Be limited to occupation for less than 31 days at a time. Any rental periods for more than 31 days do not count towards the above letting conditions.

There are some exceptions to longer-term lets in exceptional circumstances, but ideally, you should make sure that the property is only used for short term lets of less than a month, in order to ensure it will qualify as a Furnished Holiday Let.

If you find you’re not able to rent the property for 105 days in a 12-month period, for example, there may be other options.

If you have multiple rental properties, we can take an average of the letting conditions across them, as long as the other conditions are met.

And if you genuinely intended to rent it out as much as possible, but market conditions weren’t favourable for example, there is a grace period which can be applied too.

The tax benefits of Furnished Holiday Lets

The first benefit from Furnished Holiday Lets is that any profits you make are treated as earned income. That means you can use them for pension contributions and take advantage of the tax breaks there. Profits made from normal letting activities cannot be used in the same way.

Secondly, you’ll get tax relief on all financial costs incurred when letting your holiday home. Letting fees, accountant costs etc. This isn’t the case for normal rental properties.

You can claim capital allowances for the furnishing of your holiday let too, on purchases of furniture, white goods and other integral features. You can’t claim the same allowances for a rental property, even if you’re furnishing it in the same way.

Finally, you’ll also find that FHLs qualify for a range of Capital Gains Tax Reliefs, including Rollover Relief, Gift Relief and Entrepreneurs’ Relief. Get in touch to discuss how these reliefs could affect your financial situation.

The negative side of FHLs

It’s also important to chat with us if you’re thinking about registering your property as a Furnished Holiday Let because there are other considerations you should be aware of. They may affect your decision and might outweigh the benefits you could stand to receive.

For example, any losses arising from an FHL are restricted in how you can use them. You can’t offset them against other income, as you can other with business situations, and can only use them against future profits from your holiday let.

If your holiday home proves popular, and your earnings go above the VAT registration threshold, you’ll also need to register for VAT and start charging it to your renters.

And perhaps most importantly, although Furnished Holiday Lets are treated as a business asset when it comes to Capital Gains Relief, that’s not the same for Inheritance Tax. They’re unlikely to qualify for Business Property Relief.

There are some exceptions, but if you have Inheritance Tax considerations, definitely make an appointment to discuss them with us, especially because Inheritance Tax may be changing in the future.

Changing ownership of rental properties 

If you won’t be using your property as a holiday let, but you’re renting it out in other ways, then you might want to consider another option to reduce your Income Tax and Stamp Duty Land Tax (SDLT).

If you and your spouse both jointly own the property, and one of you is a higher-rate taxpayer, you could change the ownership structure so the basic-rate taxpayer declares most of the tax.

To do this, you’ll need to ask a solicitor to make the change to designate you as Tenants in Common, as opposed to Joint Tenants. As Joint Tenants, you have to declare the tax 50/50.

But as Tenants in Common, you can re-organise as you see fit. This is often 99/1, so the higher-rate taxpayer’s ownership is still recognised to satisfy the mortgage lender. You can now declare most of the income tax with the basic-rate taxpayer, making a significant saving.

However, making this change in ownership may result in a Stamp Duty Land Tax charge. It’s paid on the ‘consideration’, the amount of mortgage transferred from one party to another. In this case, it would the 49% transferred from the high-rate taxpayer to the basic-rate taxpayer.

This is the mortgage amount though, not the equity. You still get the usual SDLT exemptions too. So if you have a small mortgage to pay off, it’s usually worth it.

But as ever, before you make any decisions about your rental property and the ways you might be able to reduce tax, speak to a qualified accountant first.

At Brightshire, we have years of experience helping rural families and businesses find the best solutions for their finances.

Get in touch with us today here, or call us on 01270 335030