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How Is the Property Income Taxed? Over the summer, many of us will have stayed in a holiday cottage, either in the UK or abroad, and may now be thinking that it would be a good idea to purchase our own holiday home to let out...
By: LB Group
How Is the Property Income Taxed?
Any income from the furnished holiday property is treated as trading income, distinct from self-employment and ordinary property letting, and is reported annually on your self-assessment tax return. The property letting year is the same as the tax year of 6 April to 5 April, with the tax return and any outstanding tax becoming due by 31 January following the end of the tax year. However if you pay tax through PAYE, your total annual property income is less than £10,000 and the net profit is less than £2,500, you can request that HMRC collects any outstanding tax through your tax code rather than having to prepare a tax return. Income for properties owned by spouses will be split equally unless the property is owned in different proportions and an election is made to be taxed on that basis.
There are various expenses that can be deducted from the income for tax purposes, examples being: mortgage interest, council tax, utilities, insurance, repairs and maintenance, commissions to letting agencies and advertising for tenants. However, if you also use the property for your own holidays, the expenditure will need to be apportioned to disallow the private usage. Any losses made on a UK property will be offset against any other UK property profits during the year or carried forward to offset against profits in a later year.
There are additional tax reliefs if the property qualifies as a furnished holiday letting, with the criteria being: the property needs to be let on a commercial basis, be available for letting for at least 210 days per annum, actually be let for 105 days per annum and not be let to the same person for a period exceeding 31 days. If the criteria is not met in a particular year, there are various concessions and elections which may be able to be applied to ensure the property continues to qualify.
If the property does qualify, then fixtures, fittings and furnishings in the property will be subject to tax relief through the capital allowances regime. Additionally, any profits made on the property can count as earnings for the purposes of making personal pension contributions. This is particularly useful for individuals with no or low levels of earned income, such as home-makers or those living off investment income, who wish to make higher levels of pension contributions to save towards their retirement.
What happens when I sell the property in the future? Furnished Holiday Properties…
When the property is ultimately sold, a capital gain may arise if the property has increased in value over the period of ownership and, if after claiming any applicable reliefs or deductions, there is a taxable gain, this will give rise to a capital gains tax liability at a rate of 18% or 28% dependent upon whether you are a basic or higher rate taxpayer. The purchase price and purchase costs, together with any capital improvements made to the property over the period of ownership can be offset against the proceeds when calculating the gain. You will be taxed on your percentage ownership of the property and the usage of the property over the whole period will be reviewed as this can affect the level of chargeable gain. Subject to qualifying as a furnished holiday let and meeting the relevant relief criteria, it may be possible to claim Entrepreneur’
If you decide to buy a holiday property abroad, you will still be liable to UK tax on this income in addition to complying with the tax regime in the country where the property is situated, unless exceptionally you are not UK domiciled. However, you may be able to claim double taxation relief to offset foreign tax paid against your UK tax liability. Any losses on foreign property are ring-fenced and cannot be offset against profits on UK property, but are instead carried forward against future profits from the same property business. Additionally, properties outside the European Economic Area are not eligible for furnished holiday lettings reliefs.
You should stop to consider that the property is actually likely to stand empty for many weeks of the year and the level of weekly income varies greatly by season. The lack of guaranteed income and its sporadic nature is a particularly important consideration if the property is mortgaged and the income is needed to meet those mortgage payments. There are also insurance and maintenance issues for empty properties and council tax will be payable on the property throughout the year, regardless of occupation.
As you will see, properties that qualify as furnished holiday lettings provide for greater tax benefits so this is an important factor to consider.
The rules regarding properties are complex and you should always consult a professional adviser prior to making any decisions to ensure you attract the maximum level of tax reliefs available.
Please note the above does not constitute financial advice and LB Group cannot be held responsible for any errors or omissions.