Holiday home tax breaks

Taxpayers looking to invest in property in a tax-effective manner might like to consider buying a holiday home. If you meet certain conditions you can dramatically reduce your capital gains tax bill when you come to sell the home. This is different from buying other forms of residential property, such as via the popular buy-to-let scheme. However, property speculators need to be careful as other tax changes are afoot that may increase costs.

Holiday homes are treated differently as for many owners they are a form of business. Because of this, you can claim capital allowances on plant and machinery. These mean you can set the cost of buying such items against the income you earn from the property over several years. Similarly you can set losses against other income for the same or the next tax year. And losses in the first four years of the business can be deducted from other income made in the previous three years.

As well as effectively gaining income tax relief, you can make tax savings in other areas. Money made from letting out the property counts as ‘net relevant earnings’ for property contributions, allowing you to boost what you can put into a pension. Also when you come to sell the property it is treated as a business and qualifies for the special business reliefs from capital gains tax. These effectively reduce the rate of tax on any capital gains to 10 per cent after the property is held for two years. Also there is no inheritance tax to pay on death.

To qualify for these breaks though the holiday home must be furnished, available for letting to the general public on a commercial basis for at least 140 days a year and actually be let for a minimum of 70 of those days. In addition the property cannot be let to the same person for 31 days consecutively in a period of at least seven months. If you own more than one furnished holiday home, you can average out these letting and occupancy conditions between all of them.

One mooted tax change may make owners of holiday homes worse off though. The Government has recently revealed plans to allow local authorities to charge full council tax rates on second homes. At present, owners can claim a 50 per cent discount on such properties. The change, which would affect 500,000 homes at an average cost of £400 for each property, is proposed in the Local Government Bill.

(22/06/02)