The ups and downs of the UK economy often raise questions for individuals about how best to invest their hard-earned savings. Many see rental properties as a good investment and residential lets can bring extra tax perks if they qualify as “furnished holiday lettings” (FHLs).
Broadly, FHLs qualify if the tenants are entitled to use the furniture and:
- The accommodation is available for commercial letting to the public generally as holiday accommodation for at least 210 days in the tax year;
- The accommodation is actually commercially let as holiday accommodation for at least 105 days in the tax year; and
- During the tax year, the same tenant must not use the property for more than 31 days, if the property is let to the same tenant for more than 31 days but less than 155 days, these days will not count for point 2 above. If let for more than 155 days to the same tenant, the property will no longer qualify as a FHL.
FHLs also do not suffer from the restriction of loan interest for residential lettings that were introduced from April 2017. In addition, any capital gains arising from disposals of FHLs may qualify for Rollover Relief, Holdover Relief on gifts or a reduction in the Capital Gains Tax rate from 28% to 10% by claiming Entrepreneurs’ Relief.
The provision of holiday accommodation is within the scope of VAT. Therefore, if the income from the FHL exceeds the VAT threshold the owner must register for VAT. Care should be taken if the sole owner of the FHL is also self-employed and making taxable supplies. In this case, the turnover from the sole-trade and the FHL must be taken into account in determining whether the VAT threshold has been breached.
One of the most important decisions a business person has to make when setting up is the vehicle to be used for the enterprise. In recent years, the fashion has been for sole traders and partners to incorporate largely to take advantage of low Corporation Tax rates and the tax treatment of dividends. However, the introduction of dividend tax in 2016 has reduced some of the tax benefits. Other common problem areas to be considered are:
- Which assets of the business are to be transferred to the company?
- How will you identify expenditure that is personal to the owners and the personal use of assets owned by the company?
- What will be the additional tax payable on the later extraction of funds from the company?
- Will there be any effect of the incorporation of other limited companies owned by the same people?
Ultimately, the choice of personal ownership or companies for FHLs is complex and it is usually advisable to discuss the long-term strategy of the investor and carry out an in-depth tax analysis to choose the optimum tax outcome.
As with all such tax situations, advice should also be sought before proceeding. For further details contact Ann Bibby.