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Thread: Tax implications of a second home

  1. #1

    Tax implications of a second home

    Evening All,

    I find myself pondering the idea of purchasing a second house and renting it out for holiday lets, along the lines of AIRBNB. Could anyone explain to me how the tax situation works on this please? I pay 40% tax for reference.

    Any help greatly received.

    Kind Regards

    Glyn

  2. #2
    You will pay an additional 3% Stamp Duty on purchase.

    Any income will be taxed at your higher rate (40%). However, most of your costs (maintenance, renovations etc) will be deductible before that.
    Last edited by Bravo73; 8th August 2020 at 21:57.

  3. #3
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    The tax treatment of Furnished Holiday Lettings (as defined) is more favourable than that of buy-to-(residential) let.

    https://www.gov.uk/government/public...-lettings-2018

    As a FHL it’s easier to “shift” income to, say, spouse/other half who may pay tax at lower rates.

    The income subject to tax is broadly the commercial profit that you make.

    Not sure how big your plans are but, unlike residential letting, I think holiday letting is subject to VAT if the registration threshold is reached.
    Last edited by David_D; 8th August 2020 at 22:03.

  4. #4
    Quote Originally Posted by David_D View Post
    The tax treatment of Furnished Holiday Lettings (as defined) is more favourable than that of buy-to-(residential) let.

    https://www.gov.uk/government/public...-lettings-2018

    As a FHL it’s easier to “shift” income to, say, spouse/other half who may pay tax at lower rates.

    The income subject to tax is broadly the commercial profit that you make.

    Not sure how big your plans are but, unlike residential letting, I think holiday letting is subject to VAT if the registration threshold is reached.
    Hi David thanks for this,

    In good year potentially the rental could raise £40000, however on average it would be around £30000, I know nothing about VAT so would this apply?

  5. #5
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    Quote Originally Posted by glyn696486 View Post
    Hi David thanks for this,

    In good year potentially the rental could raise £40000, however on average it would be around £30000, I know nothing about VAT so would this apply?
    The VAT threshold is circa £80k so sounds like you wouldnt need to worry.

  6. #6
    No VAT.

    Potentially no council tax either as may qualify for small business rates and that can be zero

    Some favourable tax treatment BUT second homes likely to under scrutiny when HMG decide to try and pay off the furlough debts et al


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  7. #7
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    Quote Originally Posted by glyn696486 View Post
    Hi David thanks for this,

    In good year potentially the rental could raise £40000, however on average it would be around £30000, I know nothing about VAT so would this apply?
    No, think the Registration threshold is £87,000 or so, so you’re well under.

    Not sure if you can hold a holiday let in a pension but, subject to your wider pension position, you can make pension contributions from your letting profits. Might be worth considering?

  8. #8
    Quote Originally Posted by Bravo73 View Post
    You will pay an additional 3% Stamp Duty on purchase.

    Any income will be taxed at your higher rate (40%). However, most of your costs (maintenance, renovations etc) will be deductible before that.
    Thanks Bravo73


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  9. #9
    Quote Originally Posted by dandanthewatchman View Post
    No VAT.

    Potentially no council tax either as may qualify for small business rates and that can be zero

    Some favourable tax treatment BUT second homes likely to under scrutiny when HMG decide to try and pay off the furlough debts et al


    Sent from my iPhone using TZ-UK mobile app
    That is interesting, I was not aware of that, definitely something to bear in mind, thankyou

  10. #10
    Quote Originally Posted by David_D View Post
    No, think the Registration threshold is £87,000 or so, so you’re well under.

    Not sure if you can hold a holiday let in a pension but, subject to your wider pension position, you can make pension contributions from your letting profits. Might be worth considering?
    thanks David, this is all new to me. We are in the process of purchasing our new family, which is taking longer than I had hoped. This opportunity has croped up in the mean time, and whilst we are renovating our new house might be a good option for us to escape to if it becomes too hectic. We are fortunate that we live not far from the coast, this is right on the coast so is an ideal holiday rental.

  11. #11
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    Quote Originally Posted by glyn696486 View Post
    thanks David, this is all new to me. We are in the process of purchasing our new family, which is taking longer than I had hoped. This opportunity has croped up in the mean time, and whilst we are renovating our new house might be a good option for us to escape to if it becomes too hectic. We are fortunate that we live not far from the coast, this is right on the coast so is an ideal holiday rental.
    Definitely worth exploring ownership options (including partner and children having an interest in the property). Obviously there are some complexities and more so if you are borrowing funds.

    A switched on accountant should be able to discuss options. There’s a lot to take in and you may just decide to do it the “easy” way to get the job done. It’s good to be aware of tax efficiency opportunities but sometimes the need to act quickly takes precedence!
    Last edited by David_D; 9th August 2020 at 09:58.

  12. #12
    Master PhilipK's Avatar
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    As a second home, would you be liable for CGT on any increase in value when you go to sell it?

  13. #13
    Quote Originally Posted by PhilipK View Post
    As a second home, would you be liable for CGT on any increase in value when you go to sell it?
    Possibly, it’s not something I am that concerned with to be honest as it would not be something that I would look to sell.


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  14. #14
    Re CGT: I do think that the current level of spending makes increased wealth taxes more likely over the next few years, and property is a relatively easy target - rather hard to hide. I also doubt that higher rate relief on pension contributions will survive much longer, so that might be worth considering too.

  15. #15
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    Quote Originally Posted by Bravo73 View Post
    You will pay an additional 3% Stamp Duty on purchase.

    Any income will be taxed at your higher rate (40%). However, most of your costs (maintenance, renovations etc) will be deductible before that.
    When (if) the property is subsequently sold, are selling costs (Estate Agent, Solicitor etc.) costs deductible?

  16. #16
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    Quote Originally Posted by Pretzel View Post
    When (if) the property is subsequently sold, are selling costs (Estate Agent, Solicitor etc.) costs deductible?

    Yes. Sale and purchase costs are allowed for CGT purposes - not as a deduction from rents for income tax purposes.

  17. #17
    Master Ruggertech's Avatar
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    I stand to be corrected, but if you officially make it your main residence for six months or more does it become exempt from cgt?

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  18. #18
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    Quote Originally Posted by Ruggertech View Post
    I stand to be corrected, but if you officially make it your main residence for six months or more does it become exempt from cgt?
    Think that’s a bit of a misunderstanding. It’s the quality of occupation rather than quantity that counts. Unlikely that it would be possible to make a compelling case for the property being ‘principal private residence’ for that period. In any event, the total gain would be time apportioned over the whole period of ownership.

    I believe that currently a gain on a furnished holiday let qualifies for favourable CGT treatment - Entrepreneur Relief (or whatever it’s called now).

  19. #19
    Master Ruggertech's Avatar
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    Quote Originally Posted by David_D View Post
    Think that’s a bit of a misunderstanding. It’s the quality of occupation rather than quantity that counts. Unlikely that it would be possible to make a compelling case for the property being ‘principal private residence’ for that period. In any event, the total gain would be time apportioned over the whole period of ownership.

    I believe that currently a gain on a furnished holiday let qualifies for favourable CGT treatment - Entrepreneur Relief (or whatever it’s called now).
    Cheers david, I wasn't at all sure, thanks for clearing that up.

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  20. #20
    Quote Originally Posted by David_D View Post
    Think that’s a bit of a misunderstanding. It’s the quality of occupation rather than quantity that counts. Unlikely that it would be possible to make a compelling case for the property being ‘principal private residence’ for that period. In any event, the total gain would be time apportioned over the whole period of ownership.

    I believe that currently a gain on a furnished holiday let qualifies for favourable CGT treatment - Entrepreneur Relief (or whatever it’s called now).
    I am unsure where the concern over CGT has come from. It’s not something I’ve mentioned. Is there a break point when it’s not payable, for example after time etc?


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  21. #21
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    Quote Originally Posted by glyn696486 View Post
    I am unsure where the concern over CGT has come from. It’s not something I’ve mentioned. Is there a break point when it’s not payable, for example after time etc?

    I may have mentioned in passing. Anyway, CGT only arises on a disposal (including gifting) so you can "avoid" by retaining! No time exemption but, as I said, currently favourable CGT treatment in any event

  22. #22
    Quote Originally Posted by David_D View Post
    I may have mentioned in passing. Anyway, CGT only arises on a disposal (including gifting) so you can "avoid" by retaining! No time exemption but, as I said, currently favourable CGT treatment in any event
    Hi David,

    Firstly sorry, having just read my message it looks a little curt, that was not my intention, I was muti tasking, something I should not try to do.

    Would it therefore be more beneficial to purchase it as family?

    You seem to be very well read on this, is it in a professionals capacity?




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  23. #23
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    Quote Originally Posted by glyn696486 View Post
    Hi David,

    Firstly sorry, having just read my message it looks a little curt, that was not my intention, I was muti tasking, something I should not try to do.

    Would it therefore be more beneficial to purchase it as family?

    You seem to be very well read on this, is it in a professionals capacity?
    No worries; I didn't read it like that!

    You ask if it would be beneficial to purchase as a family. As with many personal finance/tax questions, the answer is, "it depends"! In terms of tax, you have (ignoring SDLT on the purchase) income tax on profits, CGT on ultimate sale (or gifting) of the property and potential Inheritance Tax on any money you gift now (eg to facilitate the purchase of a FHL) and on the property as part of your estate when the time comes. (FHL probably doesn't qualify for Inheritance Tax "Business Property Relief" but, apparently, it's not clear cut.) It is possible that holding the property between several family members will reduce the overall tax burden (although they will own their share, of course, so you personally will almost certainly be worse off than you would have been just bearing all the tax!) While families are getting on, these arrangements may be great but you do, sadly, need to consider what might happen in the event of family disputes.

    I am a finance person but not in this specific area. I've an interest in buy-to-let stuff and I try to keep up to speed with these types of things generally. Now that is sad! I'm not able to give advice per se but hopefully I've given you some food for thought to discuss with people who can advise you knowing the detail of you and your family's circumstances.

    The best advice might be to start with a financial planning expert. Certainly Inheritance Tax and pension planning is something they are better placed to deal with than an accountant. A good solicitor to make sure any arrangements are properly documented would be a good idea too.

    Anyway, good luck with whatever you decide to do. Hope it works out well for you.

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