TaxAug 23 2018

What do clients with holiday lets need to know about tax?

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What do clients with holiday lets need to know about tax?

Buying a holiday home in the UK or abroad unfortunately doesn’t mean taking a holiday from the taxman.

“Clients always need to investigate the tax implications and different mortgage options available before purchasing a home they intend to let out to holidaymakers,” says Danny Belton, head of lender relationships at Legal & General Mortgage Club.

“This must be done via a qualified tax expert, which most mortgage advisers are not, and nor do they claim to be.”

Many advisers will often already have a tax expert they use, but if you do not, then it may be worth making sure there is a tax contact to refer clients to who specialises in holiday lets across regions.

Guy Nyirenda, a partner at Coreco, confirms: “Mortgage brokers are not tax advisers, so we would always recommend taking advice from a tax adviser and solicitor who are experienced in this area, following which the broker can assist to put the right finance in place based on this advice.”

UK resident individuals with holiday homes – at home or abroad – which they let out, will generally suffer income tax on income received from those furnished lettings.Jackie Hall

This does not mean to say mortgage advisers and brokers cannot help clients during the process of purchasing a property to let out to holidaymakers, whichever country they are considering buying in.

“There are numerous ways in which advisers can help their clients to buy a holiday home abroad and provide guidance throughout the process,” Mr Belton suggests. 

“This can be done by either raising capital on the client’s home, or other UK property, or by taking out a mortgage on their overseas property.” 

“However, with so many tax and legal matters to consider when buying a property abroad, clients would need tax advice based on UK law, as well as the law of the country they are purchasing the property in.”

Going local

Mr Nyirenda explains: “As regards assisting buying homes abroad, it does depend on the location and the size of mortgage that can dictate which lenders are in the market for that borrower. 

“There are some specialist brokers in the market now that solely advise on overseas mortgages, who have contacts with banks in different countries to arrange the mortgage. 

“There are some clients who prefer to borrow against their UK property and pay for cash for the overseas property, which most good brokers can assist with.”

He agrees it is necessary to take local legal advice in the location of the purchase, “to go through the prevalent local laws of ownership to ensure the buyer is fully aware of any risks and restrictions on the ownership”.

So what kind of tax complications might advisers come across and the kind of pitfalls they should avoid?

Jackie Hall, a tax partner at RSM, says: “UK resident individuals with holiday homes – at home or abroad – which they let out, will generally suffer income tax on income received from those furnished lettings. 

“Although such property income is calculated in a similar way to trading income, it is treated as investment income. 

“This means the income doesn’t count as relevant earnings for pension contribution purposes and, if the property is disposed of, reliefs often available on business assets, such as Hold-over [Relief] or Entrepreneurs’ Relief for capital gains and Business Property Relief for inheritance tax (IHT), are not available.”

Serious implications

If the purchaser has gone down the route of raising finance to purchase a property specifically for letting, then they will have to consider other costs.

Ms Hall explains: “Finance costs incurred on or after 6 April 2017 are restricted when calculating the taxable property profits. 

“Although some relief is still available during a transitional period up to and including the 2019 to 2020 tax year, these deductions are gradually withdrawn and replaced with a basic rate relief tax reduction.”

She warns: “This can have serious implications for the overall profitability of the venture.”

However, there are some exceptions, as she details: “For example, if the property is commercially let as furnished holiday accommodation, it will be treated as a trade for the purpose of carry forward of losses against future profits and relief for pension contributions.

“Capital gains tax reliefs, such as Hold-over Reliefs and Entrepreneurs’ Relief may also then be available where all the qualifications are met. This favourable treatment is not automatically extended to Business Property Relief (BPR) for IHT purposes.”

Ms Hall confirms that furnished holiday lets must be let out for at least 105 days in a tax year and be available for letting for at least 210 days.

Many countries have pre-determined routes for foreigners purchasing property and some of these routes can inadvertently trigger unnecessary and potential penal tax liabilities in the UK.Mark Pearce

It has already been established that when buying a holiday property in another country UK purchasers should seek out legal and tax advice in that region, as well as in the UK. 

It’s possible the client may already own a property abroad and this is a second or even third holiday let for their portfolio. In which case, the client should not assume they know what taxes need paying.

Mark Pearce, a tax partner at Irwin Mitchell Private Wealth, explains: “If clients already own properties abroad then they should check that they have complied with any reporting or regulatory requirements in both countries, as well as reported and paid the appropriate taxes.

“Many countries have pre-determined routes for foreigners purchasing property and some of these routes can inadvertently trigger unnecessary and potential penal tax liabilities in the UK.” 

He continues: “For example, purchasing property in New Zealand used to involve settling money into trust and having the trust buy the property. For a UK individual, if they settle more than £325,000 in trust, there is likely to be an immediate 20 per cent inheritance tax charge.

“Alternatively, if a property is owned through a company and the clients are directors of that company there can be director benefit charges on the free use of that property by the client and their family.”

He cautions that even after a property has been purchased there can be tax implications if the property is let out either through an agent or privately, so reiterates that advice needs to be taken before any change in circumstances with the use of the property.

Sun, sand and succession

What about passing a holiday let on should the owner wish to hand responsibility to another member of their family perhaps?

Mr Pearce notes succession is another common issue.

“The UK has testamentary freedom, meaning that a person can bequeath their assets as they wish,” he says. “France, for example, has forced succession law meaning that French assets must pass in a strict order. 

“Clients with assets in more than one country will need to consider whether they need to leave testamentary documents in both countries to comply with local regulations.”

It is so often the case that after returning home from an overseas break many of us suddenly long to buy a holiday home. The sun, sea and sand is fresh in clients’ minds, but the realities of this kind of purchase may not be so clear.

Mr Pearce acknowledges: “Buying property abroad may seem an attractive proposition but any potential purchaser must ensure they are fully aware of all of the implications, both abroad and back here in the UK, before taking any action.”

eleanor.duncan@ft.com