2015 Summer Budget and Autumn Statement
What’s of interest to FHL owners
We invited our accountants, Simpkins Edwards, to offer a thumbnail description of the way the changes in the 2015 Summer and Autumn budgets will affect holiday cottage owners to help identify and calculate possible changes in the tax payable on your property.
Although the news has been in the public domain for a few months, as we approach a period when many owners will be preparing their budgets for 2016-17 (and prices for 2017), it would be opportune to provide this information. Here’s what Partner Jilly Watson has to say.
If you are the owner of a holiday cottage, there were various announcements in the Summer Budget and Autumn Statement which will directly affect you as a second property owner or would directly affect you, should your cottage no longer qualifies as furnished holiday lettings (FHL).
The main changes announced in the Autumn Statement affecting buy to lets and second homes, including FHLs:
These changes will make buying a second property after 1 April 2016 more expensive with the increase in stamp duty land tax (SDLT) on second properties and after April 2019, bringing forward the date on which capital gains tax on the sale of a second property will become due. - Stamp Duty Land Tax on second properties: The government has announced that from April 2016, there will be a 3 percentage point hike in the SDLT rates on purchases of additional residential properties. A residential property worth less than £40,000 will not be taken into account when considering if an additional property is being purchased. (The definition of residential property excludes caravans, mobile homes and houseboats.)
It is the government’s intention that properties bought as furnished holiday lets will be treated the same as other residential properties and therefore this increase in SDLT will apply if the property purchased is an additional property.
If you are considering or are in the process of purchasing or selling a second or additional residential property you need to complete the sale on or before 31 March 2016 to avoid the additional SDLT charge. - CGT payment date: Another announcement, but not due to take affect until April 2019, is the requirement for CGT arising from the sale of a residential property to be paid on account within 30 days of completion of the sale. (It would otherwise have been due 10 months after the end of the tax year in which the sale took place.)
This will not change the amount of tax due, just the timing of the payment. The detail of this announcement is not yet known. Draft legislation is due to be published for consultation during 2016.
Furnished Holiday Lets
You have a holiday cottage, but does it qualify as furnished holiday lettings (FHL) for tax purposes? - The property must be let commercially with a view to making a profit - There must be sufficient furniture for normal occupation - The property must be available for 210 days per annum - The property must be actually let for 105 days per annum - Any periods of longer term occupation (say, winter lets) must not exceed 155 days per annum
If the property does not qualify in a bad year, there are a couple of elections that may help you. An ‘averaging’ election might be possible if you have multiple properties (but you cannot mix UK and other EEA property businesses). It allows you to average the let days over the properties in each letting business. A ‘period of grace’ election is available to single property and multi property businesses and is in addition to the averaging election. This election allows you to treat a year as a qualifying year, if you were unable to meet the 105-day threshold, despite having a genuine intention to do so.
So why is it so important to be aware of these rules? If your property qualifies, there are certain advantages over ‘ordinary’ residential lettings:
- The ability to claim capital allowances for income tax purposes. This lets you write off the cost of certain capital assets against taxable income
- FHL income counts as relevant earnings when considering the maximum pension contributions you can make
- Favourable capital gains tax treatment if you sell the property
- Possibly favourable inheritance tax treatment, given the right circumstances
And what happens if you don’t qualify as a FHL:
First off, your holiday cottage will be re-categorised as residential letting and you will lose the preferential treatments given to FHLs detailed above.
Secondly, you need to be aware of various key changes announced in the Summer Budget that will now affect you as a residential landlord - finance costs, which is bad news for those with borrowings, but also two bits of good news regarding the ‘wear and tear’ allowance and ‘rent a room’: - Finance costs: The government announced that there is going to be a restriction on the amount of tax relief that landlords can claim on their finance costs. For example, mortgage interest and arrangement fees. The relief will be at the basic rate of income tax only and is going to be calculated differently. Instead of being an expense deducted from rental income, it will be given as a relief deducted from your tax liability. The outcome of this is that you are likely to have higher taxable income and for some people, they may end up being pushed through a threshold to a higher tax band. To allow tax payers to get used to the idea(!) the new rules are being phased in over 4 years starting in 2017/18. By 2020/21 all relief will be claimed by a basic rate tax deduction.
This key change does not apply to FHL landlords or to companies. You could give some thought to owning residential property through a limited company, but there are multiple issues to consider, including the changes to the dividend regime, also announced in the summer budget. - Replacement of wear and tear allowance: Landlords of fully furnished residential lettings are currently eligible for a deduction to cover depreciation of equipment and furnishings, by way of a 10% ‘wear and tear’ allowance (based on rental income less various costs that the tenant would normally pay).
Landlords of partly furnished properties (since April 2013) have not been able to make a similar claim unless the expenditure can be classed as a repair.
From April 2016, the ‘wear and tear’ allowance will be removed, to be replaced by a new relief for replacement furniture that will be available to all residential landlords. Do remember that the initial cost of furnishing the property will not be allowed.
This is a welcome amendment to put both furnished and unfurnished residential lettings on the same footing and to put right an anomaly that had crept in when HMRC tweaked the rules. - Rent a room: Do you provide furnished accommodation within your own home? For years a tax payer has been exempt from income tax on the profits, if the gross income they have received has been less than £4,250. At last, this threshold is to be increased, to £7,500 per annum (from April 2016).
If gross income is in excess of £4,250 (soon to be £7,500) the income can be taxed on an alternative basis which may produce a tax saving.
This is a brief look at some of the key changes. No two situations are exactly the same and as with everything, there are exceptions to the rule – which might just apply to your circumstances. You should seek advice before taking any action to give your adviser the best chance of keeping your tax bill as low as possible. If you are looking for advice in connection with your property lettings, call us on 01271 342233. We’d be delighted to listen to your particular circumstances and see how we can help you.