Devon Property Management Company

Top Tax Tips for second homes/rental properties in Devon

kelli

Tuesday, June 30, 2015

There are many reasons why people decide to invest in a second home or holiday let. For example, it could be as a tangible investment and a source of second income. It might also simply be an escape to the countryside as and when needed. There are a number of tax considerations that must be taken into account before you think about that extra revenue stream. The types of tax you will be liable for are: Stamp duty land tax, Council tax, Capital gains tax and Income tax.

Furnished Holiday Lets

If you rent out your holiday home as a furnished holiday letting in the UK, the rental income generated from this home is treated differently to other rental incomes in terms of tax. If your property is considered to be 'furnished' it must comply with a set of guidelines, these include:

It is available for holiday lettings to the public for at least 210 days of the year
It must be occupied with paying guests for at least 105 days in the year
It is fully furnished so that guests can be accommodated without the need for extra furnishings
Individual lets should not exceed 31 days so your holiday home must not be let to the same person for more than 31 days in the year

Stamp Duty Land Tax

This must be paid when you buy any home that is more than £125,000. The rate that is paid depends on the purchase price of the property. For holiday homes you'll pay:

Nothing on the value up to £150,00 with an annual rent of less than £1,000.
1% on properties up to £150,000 with an annual rent of £1,000 or more.
1% on properties between £150,001 and £250,000
3% on properties between £250,001 and £500,000
4% on properties over £500,000

Council Tax

When owning a second home it could make you liable for council tax on both of the properties and almost certainly will make you liable for your primary residence. Once your home is furnished you may have to pay council tax at 100% of the valuation tariff. To prevent this you must inform your local council straightaway that it is a second home/holiday let.

Capital Gains and Income Tax

If you are a UK resident owning a second home you are liable for capital gains tax when you come to sell the property. Capital gain tax does not differentiate between a basic rate taxpayer or higher rate taxpayer as the sale of a furnished holiday home should qualify for Entrepreneurs relief, this means that the effective tax rate on a sale is just 10%. There are also two other types of capital gains tax relief, firstly there is the possibility to 'roll-over' any gains made on the sale of the holiday home into the purchase of another property or separate business asset. The other type is to 'hold-over' any gains that arise on gifting the property. This then passes over any capital gains tax until the new owner goes to sell the property.

Expenses

For most holiday rental businesses you are able to offset most if not all of your expenses through the income earnt through renting out the property. It is important to be aware of all the expenses that will need to be covered and make sure that your rental price matches your expenses. The typical costs include:

Monthly mortgage payments (including tax)
Insurance on the property
Repairs, decorating and general maintenance
Housekeeping
Marketing costs

To be able to break even on your holiday home you must work out all of your expenses inline with the anticipated rental income across the whole year. Coastal destinations like Devon and Cornwall usually experience 12 peak weeks, this is where your tariff should be higher as these weeks are high demand and that means you should try and cover most of your yearly expenses in these weeks. To cover additional costs you should lower the tariff in the off-season so it is more attractive to potential renters.

If you feel the numbers stack up and you are ready to take the plunge, why not talk to Montagu Property Services who will advise on all aspects ofproperty maintenance and property management so you get the best out of your investment.