We have a second home on the island of Arran which we can no longer afford to keep following a change in circumstances. We are loath to sell and would rather cash in an investment to develop the property so that we can hand over to a property management company on the island to manage holiday lets throughout the year. Can you advise about the relevant and latest tax rules? If we go down this route and then need to sell, for how long would the property be liable to the higher business rate capital gains tax? Thanks, XXXXX XXXXX
The bad news is that from 6 April 2010 the preferable tax rules applicable to furnished holiday lets (FHL) no longer apply. Unless the letting trade can be proved to be a business - this could be difficult if you are engaging the services of a letting agent - on a sale there iis no "business tax" relief available for capital gains tax. However, any gain (after taking into account the capital improvements) will only be taxable at 18%.
Any profit arising on the rental income will be taxable on you - to be disclosed on a tax return - and any tax payable due on the 31 January following the end of the tax year - 31 January 2011 for rental profit made during the tax year ended 5 April 2010.
Any rental losses can not be set against other income in the year - they can only be carried forward and set against any future losses.
I hope that this answers your query.
What are the preferable tax rules that are changing? Can the letting agencies fees and any other maintenance costs be part of the profit and loss accounts? I am paying 40% tax but my wife is not earning - would we be able to declare this income against my wife's name to pay less tax? Can you confirm if capital gains tax is 18% now or is this a future change? Finally can you confirm it will make no difference to capital gains tax due whether or not we let the property? Thanks, Pete
In answer to your queries:
1) Yes agents fees and maintance costs can be deducted from the rents received;
2) If the property is also held in your wife's name I would treat this letting income as her own (so if there is a profit she will only pay tax on it at 20%);
3) The capital gains tax rate is currently at 18% - there was no mention of any increases in the pre-budget report; and
4) There will be no difference to the capital gains tax payable if you let the property or not.
The changes to the FHL rules are (simply):
1) Losses could be set against other income thus generating tax repayments;
2) Entrepreneurs relief would be available thus reducing the capital gains tax rate from 18% to 10%; and
3) For inheritance tax purposes the asset was classed as a business therefore only 50% of the value was chargeable to inheritance tax on death.
CTA, ATT - over 10 years experience in UK tax - CGT, IHT & personal tax