How will taxation changes affect holiday letting?

Taxation changes announced by the Chancellor during 2015 applying to buy-to-let doesn’t affect holiday homes – and the returns can sometimes be far higher.

Renting out a two-bedroomed cottage to holidaymakers can produce a gross income of between £10,000 and £15,000 a year, depending on the location and quality of the property. Larger properties can average up to £30,000 a year gross.

Desirable tax breaks add to the appeal of holiday-home ownership – at a time when the Government is slashing tax reliefs associated with other property investments, such as buy-to-let.

There is one new change which will affect both parties – people buying additional property, including buy-to-let or second homes, will face a 3 percentage point surcharge on stamp duty rates from April 2016.

If you operate under the “Furnished Holiday Letting” rules, you can offset all expenses including full mortgage interest against the rental income. This compares with the scaling back of tax relief on buy-to-let from 2017.

So, for example, if you were buying a cottage for £350,000 with a 75pc mortgage fixed for two years at 2.85pc, a landlord in the 40pc tax bracket could claim £2,992.50 in tax relief, while from 2017 a buy-to-let landlord’s tax relief will be capped at £1,496.25 – a difference of nearly £1,500.

Running a holiday let is treated by HM Revenue & Customs in the same way as any trading business, so losses can be carried forward and offset against future profits.

Furnished holiday lets also qualify for entrepreneurs’ relief, cutting any potential capital gains tax take to 10pc. Otherwise any taxable gain will be hit by an 18pc deduction below the higher rate threshold or 28pc above.

To qualify for furnished holiday-let tax treatment, the property must be available for letting for 210 days a year and actually let to the public for 105 days. If you have more than one property, occupancy can be averaged to qualify.

For more information about taxation changes or anything else relating to holiday letting, please don't hesitate to get in touch with one of our property managers here at Cornish Horizons.