Challenging tax environment for Landlords
When it seems that HMRC are throwing every possible hurdle in the way of landlords there may be a way to increase your returns by switching your letting strategy to short term lets. Many landlords are looking at complex structures to mitigate these changes, such as incorporation and hybrid LLP structures.
As property prices have increased over the last 10 years the rental returns have not kept up with the capital growth. As a result many new landlords struggle to find property that will yield a sensible return. This is more so in the south of the UK where property prices are often much higher. A higher yielding portfolio can therefore be very beneficial.
With sites such as Airbnb it has become much easier to rent your property on a short-term basis. If structured properly the returns can be higher.
Based on our recent research of a small sample of the properties available in the Gatwick area gross rents can be up to 4 times more for short term lets. However the running cost of a short-term letting business may also be greater.
Key tax benefits of Furnished Holiday Lets (FHL)
In the UK there are preferential tax rules for some short-term letting businesses. These rules are known as the Furnished Holiday Let rules, see further details on qualifying criteria click here Furnished Holiday Lets.
Many landlords mistakenly believe that this is a relief only available to holiday destinations, such as the south coast or Cornwall. However these tax reliefs are available to all landlords regardless of location.
A FHL business can have the following benefits;
- Firstly, S24 (restriction on interest deductions) does not apply to lending.
- Capital allowances are available to reduce the businesses tax liability on qualifying capital expenses.
- Inheritance tax – a FHL will usually qualify for business property relief and will not be subject to IHT on death.
- Entrepreneurs relief – gains on the disposal of properties can attract the lower 10% Capital Gains Tax rate. Compared to 28% for residential disposals.
- Gift relief will be available – this can be a useful succession planning tool.
- Finally, profits from FHL’s are treated as earned income for pension purposes. Which is important if you wish to make pension contributions.
Turning your property into an FHL is not a small task, generally FHL’s require more input from the landlord due to the short-term nature of the lets. They may therefore not be suitable to landlords simply looking for a passive investment.
However, due to the tax benefits available it is well worth considering whether changing the nature of the business could qualify.
If you would like more information please contact us on 01293 301989.