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Tax implications of owning a Residence

The following is a brief outline of the current (November 2022) rules relating to personal taxation of your Residence. The guide is solely for information only. We strongly recommend that you seek professional advice from an accountant or tax advisor in relation to your purchase.

General

Any income that you earn from letting your Residence is subject to income tax. When you sell the property, it will be subject to capital gains tax as a second home. The value of the property can also form part of your estate on death.

However, there are advantages and benefits to owning a Residence which shall qualify as a furnished holiday let.

Furnished holiday Let (FHL)

Your Residence can be classified as a FHL if you meet the following conditions:

Availability condition: The Residence must be available for letting for at least 210 days per year
Pattern of occupation condition: If the total of all lettings that exceed 31 continuous days is more than 155 days during the year, this shall mean your Residence could not qualify as a FHL
Letting condition: The property must be actually let for 105 days, you can elect to be treated as if you have met the rules during the 2 years following a year where you did not satisfy the letting condition, as long as you can show that you intended to let the property on a furnished holiday letting basis. This enables owners to enjoy the tax benefits of a FHL during periods where there may be less demand. If your Residence does not meet the threshold by the fourth year, after two consecutive period of grace elections, it will no longer qualify as a FHL.

Mortgage interest Relief

Full mortgage interest can be deducted from the profits of furnished holiday lets.

Income Taxes and Losses

The income from a FHL is determined after taking into account all the costs (other than the cost of the Residence itself) incurred in respect of the letting, including, but not restricted to, repairs and renewals, maintenance costs, agency and commission fees, insurance, change-over costs, heating and lighting costs, finance costs etc. You can also claim indirect costs of letting the Residence such as telephone calls and stationary.

Losses arising from letting activity can only be carried forward against future profits arising from the same letting business.

If you do not let the Residence at a market rate, or if you use the property yourself some of the expenses may be disallowed.

Capital Allowances

You will be entitled to claim Capital Allowances on the furniture, furnishings, white goods etc. that are in your Residence but there are no capital allowances for the cost of acquiring The Residence itself. The allowances are deducted along with other expenses in calculating any profits from your FHL.

Pensions

The net income earned from your Residence is treated as ‘relevant earnings’ for pension purposes, allowing you to make tax-advantaged pension contributions.

Capital gains tax

Once the FHL has been owned by you for a complete year, any subsequent sale will be eligible for Business Asset Disposal Relief and so long as the owner has not used up their lifetime allowance, the gain will be taxed at 10% rather than at a higher rate.

The property will be eligible for roll over relief, which enables the payment of Capital Gains Tax to be deferred.

Record Keeping and Tax obligations

You must keep a record of all income that you earn from your Residence, whether as a FHL or not. You must also keep a record of all costs and you must retain all invoices and paperwork to support any deductions that you wish to claim.

You must disclose that income and relevant expenses on a self assessment tax return and there are penalties if you omit to declare all your income or if you fail to file your tax return on time.

Need further advice?

We work closely with a team of tax advisors who can give you specific advice on the purchase of your Residence and how this could affect you.

We can also recommend an independent financial advisor who can offer advice relating to pension aspects of owing a Residence and can also assist you with raising finance for your purchase.

Investment Return Summary

2 bedroom Residence
Purchase price	350,000
SDLT & fees	21,000
Furniture and appliance package	30,000
TOTAL	401,000
Income per annum (based on 28 week occupancy)	37,590
Associated costs per annum
Residence booking commission	5,638
Property management fee	4,020
Change over fee (£80 per rental)	2,240
Repairs and maintenance	500
Sinking fund - roof	600
Total	12,998
Net income	24,591

Percentage return on investment	6.1%

(Not including any capital appreciation)

N.B. The above calculations are based on estimates, individual costs may be lower or higher than shown in the example above.

Approximate Rental Calculations

Month	Season	Weeks	Approx. Rate	Occupancy	Weeks Let
Apr	L	3	£900	33%	1
	H	1	£1,500	100%	1
May	H	5	£1,500	60%	3
Jun	H	4	£1,500	80%	3.2
Jul	H	5	£1,500	80%	4
Aug	H	5	£1,500	80%	4
Sep	H	4	£1,500	80%	3.2
Oct	M	5	£1,200	50%	2.5
Nov	L	4	£900	30%	1.2
Dec	L	3	£900	30%	0.9
	H	1	£1,500	100%	1
Jan	L	4	£900	25%	1
Feb	L	4	£900	25%	1
Mar	L	4	£900	25%	1
Total		52			28
Gross income		£37,590

N.B. All figures are estimates and have been compiled using the standard relevant industry published information.

Breakdown of Annual Service Costs Are as follows:

Service Charge - £3,350 pa plus VAT

Landscaping and grounds maintenance	£150 pa
Water and sewage	£250 pa
Fire and safety testing	£55 pa
Window cleaning	£400 pa
Carpets cleaned	£250 pa
Oven cleaned	£70 pa
Internet	£240 pa
Insurance – property, public and products liability, contents and business interruption	£600 pa
Electricity - public environs	£40 pa
24 hr security	£250 pa
PAT testing	£80 pa
Fixed wire electric testing (5 years)	£100 pa
Boiler serviced	£150 pa
Wastage management	£200 pa
Pest control	£110 pa
Administration	£250 pa
Bank charges	£30 pa
Sundry	£125 pa

N.B. Costs are estimated and are likely to change from year to year.

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