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Holiday Let Mortgages – The Potential Tax Advantages?

Written by Sam Jones on 23 September 2012.

The purchase of a holiday let home through holiday let mortgages can potentially provide a significant amount of potential tax advantages. In order to claim available reliefs it is important for any potential purchaser to distinguish between, whether the holiday let purchase is part of a general investment portfolio or whether it is purchased with the view to trading in the holiday let business.

Each case will be determined on its facts, but to claim maximum reliefs, particularly after recent changes in the tax regime, only home purchases as part of a trading business are likely to benefit from the maximum relief. It is therefore essential for people considering these types of mortgages to not only seek financial help from their mortgage broker, but also independent advice from their tax accountants prior to any purchase.

Holiday homes have always historically been governed by a generous and pretty unique taxation system. The major difference between a holiday let home, which is furnished, compared to a normal buy to let property is that the furnished holiday home is potentially treated by the Revenue (HMRC) as a trade for tax purposes. In doing so, the owner/ trader may be entitled to a number of inheritance tax, capital gains tax and income tax reliefs. For example business property relief may be claimable to offset inheritance tax, capital allowances may be used as tax mitigation as well as the tax roll-over relief associated with capital gains. Obtaining these reliefs is not straightforward and a good tax planner should be contacted. It is likely that in order to claim the full reliefs available, HMRC will need to see that there is an active involvement from the owner in the operation of the holiday let business, rather than a passive relationship, where the property is simply let by remote agents. Each case will always be judged on its particular facts.

Despite an announcement by the previous Government that the current favourable treatment offered to furnished holiday lets would be withdrawn, the Coalition reversed this in the June 2010 emergency budget. The Chancellor stated he would not continue with his predecessor's proposal to abolish the favourable treatment. However, in March 2011 a number of restrictions have been placed on holiday let homes. The most significant of these changes being that losses obtained in the course of letting a holiday let cannot be offset against other Buy To Let property within the owner’s portfolio. They can still however be potentially carried forward and be used to offset future profits of the holiday letting business.

New changes were also brought in from April 2012 and these specifically related to the qualification criteria of a furnished holiday let. This includes the fact that the property cannot be let for more than 31 days by a single tenant/customer. It must be let for at least 110 days a year and must be made available for at least 210 days per year. This has led to concern from purchasers, particularly those buying in UK summer holiday locations, given the limited season and it is essential to consider the previous occupancy when buying such property.

The main relief for inheritance tax and capital gains tax appear to have escaped any amendment and capital allowances are still allowable, but the current exact limit of £25,000 again needs to be checked with your accountant.

The above information is provided by Capital Fortune for guidance purposes only and does not constitute advice. This should in all events always be obtained from your professional tax planning providers.

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