Challenging tax environment for Landlords
When it seems that HMRC are throwing every possible hurdle in the way of landlords and second homeowners there may be a way to increase your returns by switching your letting strategy. Many landlords are looking at complex structures to mitigate these changes such as incorporation and hybrid LLP structures. One option to consider has been part of the tax legislation for many years
As property prices have increased over the last 10 years the rental returns have not kept up with the capital growth meaning that many new landlords struggle to find property that will yield a sensible return particularly in the south of the UK where property prices are often very high.
With sites such as Airbnb it has become much easier to rent your property on a short-term basis and 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 than an equivalent assured short-hold tenancy. It should also be noted however that the running cost of a short-term letting business is also likely to be greater due to increased need for services such as cleaning etc.
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, when in fact if structured correctly these tax benefits can be accessed by any landlord regardless of the property location.
A FHL business is treated as a trade resulting in the following;
- S24 (restriction on interest deductions) does not apply to lending.
- Additional capital allowances for certain capital expenditure which can be used to reduce the businesses tax liability.
- Inheritance tax – a FHL will usually qualify for business property relief and will not be subject to Inheritance Tax on death.
- Entrepreneurs relief – gains on the disposal of properties may be taxed at the lower 10% Capital Gains Tax rate (compared to 28% for normal higher rate disposal).
- Gift relief will be available – this can be a useful succession planning tool.
- Pensions – 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 and are therefore not suitable is you are simply looking for a passive investment.
However due to the tax benefits available it is well worth considering whether it is worthwhile changing the nature of the nature or if indeed the business already qualifies before considering other hybrid and corporate structures which are more likely to be challenged by HMRC.
If you would like more information please contact us on 01293 301989.