Holiday Lets and Capital Gains Tax

Furnished Holiday Lets are a popular choice with investors here in North Wales. The ability to claim full relief for mortgage interest plus the availability of valuable Capital Allowances are huge tax advantages over regular buy to lets. 

However the benefits don’t stop there. Did you know that the special tax status of FHLs could potentially save you thousands of pounds in Capital Gains Tax (CGT)? Let’s take a look.

Capital Gains Tax is payable on the disposal of a property. If you live in the property you’ll benefit from Private residence relief (PRR). For second homes though, no PRR is available and you’ll pay 18% tax on any gain within the basic rate band and a whopping 28% on anything over this.

Clearly, anything that mitigates this will save thousands in tax and this is where FHLs come into their own. 

Business Asset Disposal Relief (aka Entrepreneurs Relief)

FHLs can be treated as a business asset, which means they qualify for Business Asset Disposal Relief (BADR). This has the effect of reducing the CGT rate to just 10% on the first £1 million of lifetime gains. This can be claimed upon disposal of part of the business or the entire business.

However, you’ll need to have been running the FHL on a commercial basis for at least 2 years to qualify. For FHLs held in a company, there are further considerations regarding the definition of ‘Close Company’.

Holdover Relief

Upon the transfer of a business asset, holdover relief (HR) allows payment of CGT to be deferred until the recipient disposes of the property. When gifting a property between husbands and wives, no CGT liability arises. When gifting to relatives, the gift is treated as though it was at market value.

FHLs are business assets; therefore if the transferor and transferee both make a claim for HR, no CGT will be due at the time of the transfer.

Rollover Relief

If an FHL is sold, but the business continues with the purchase of a further FHL, then it may be possible to claim rollover relief (RR). As with HR, this allows any CGT liability to be deferred until the business ceases and the FHL is sold. Careful planning is required if the new FHL is of a lower value then the one sold as the RR will only be partial and some CGT will be due.

Don’t think of selling your FHL without taking specialist tax advice first. CGT relief for FHLs is a complex area and mistakes can be costly. 

Speak to PropertyTax.Wales for a no obligation quote.