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John Endacott, head of tax at PKF Francis Clark, shares his expert advice on the tax implications of buying and selling a holiday complex.
In the past few years, the government has pursued a policy of increasing taxes on residential property owners. This has been achieved by:
All of these measures are aimed at the owners of residential property, although if a property has a letting income, that can make a difference. The result is something of a tax minefield for purchasers of holiday letting businesses, especially when buying multiple unit holiday complexes.
The tax rules for SDLT, CGT, VAT and income tax are all different and the newness of the rules means that they are often poorly understood. This isn’t helpful to those trying to invest in a large property purchase. However, as a general principle, it is important to:
Establish whether the business will meet the criteria for the special holiday letting Furnished Holiday Lets (FHL) rules.
Determine whether the property is ‘residential’ or ‘non-residential’ for Stamp Duty Land Tax purposes and, if it is ‘residential’, then can any SDLT reliefs be claimed?
If the FHL rules apply, then there is no loan interest restriction for higher rate income tax payers, so mortgage interest and other borrowing costs should be relievable in full, as long as there is no personal use. Further, the rate of Capital Gains Tax on sale can be 10% instead of 28%.
In order to qualify for the Furnished Holiday Let rules, it is necessary for the letting units to be available for short term letting for 30 weeks a year and longer term letting is restricted during this time. The units must be actually let for at least 15 weeks in a year although it is possible to average actual occupation across the units.
While an average occupancy of 15 weeks a year for a mature business should not be too challenging, this can be very difficult to achieve on a start-up complex or in a geographically remote location and, if so, then the FHL rules would not apply. That’s the rub – if you don’t qualify for the FHL rules then the business is taxed the same way as a buy-to-let landlord – no capital allowances on capital expenditure, restricted tax relief on interest costs and less flexibility on profit sharing by a married couple. Good due diligence on likely occupancy levels is therefore essential.
Regardless of whether the business will meet the FHL rules, it is also important to understand the SDLT due (and probably get some specialist advice on it). A complex costing £1.5m would generate a SDLT liability of £138,750 if taxed at residential rates, but £64,500 if taxed at non-residential rates – a massive difference and both scenarios are possible, depending on the facts.
Residential SDLT rates are higher than non-residential rates. Further, if a home is being bought together with other residential properties, then the higher rates of residential SDLT apply, which include the 3% surcharge – even if it is replacing another home. Where this is the case, the subsidiary dwelling exemption should be considered, as should multiple dwellings relief. If the £1.5m purchase comprised five residential dwellings, then the SDLT due would fall to £70,000 if multiple dwellings relief is claimed.
There are huge differences in the SDLT that can be payable when buying a holiday complex so it is important to fully investigate the position.
John Endacott, author of ‘Furnished Holiday Lettings: A Tax Guide’