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. We discuss ways to do just this with rental properties.
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
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
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.
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
At Brightshire, we have years of experience helping rural
families and businesses find the best solutions for their finances.