If you're considering purchasing a holiday home in the UK, it's important to be aware of the tax implications. Different types of taxes may apply, depending on how you plan to use the property.
Owning a holiday home in the UK can be a great experience, and with a little planning, you can minimize your tax liability.
Capital gains tax on holiday homes
When you sell a residential property in the UK, whether it’s your main home or not, you will be liable for capital gains tax (CGT). If you buy a holiday home in the UK, you will be subject to CGT regardless of your residence status.
If you are considered to be resident in the UK, you will be subject to the remittance basis of CGT. This means you’ll only be taxed on the gain which has been transferred abroad. However, if you’re not considered to be resident in the UK, you’ll be subject to the resident and non-resident basis of CGT. This means you will be taxed on the entire gain.
If you use your holiday home in the UK for more than 21 days in any year, you will not be subject to the remittance basis and you will be considered a non-resident for tax purposes. If you use it for less than 21 days in any year, you will be considered a resident for tax purposes and will be liable for CGT on the full gain on sale.
Council tax
Holiday homes are liable to council tax just like any other property in the UK. The rate charged is dependent on the valuation band the property is placed in. Bands are set by the Valuation Office and are identified by the value, size and type of the property.
Property values and banding are reviewed every January and are payable from April of that year. Holiday homes are usually placed in band Band D for valuation purposes, even if the property is luxurious. This means you will pay more council tax than you would if you lived in the holiday home part-time.
If you use your holiday home for less than 51 days in any year, you will be able to apply for a reduction in the council tax on the property under the Council Tax Reduction (Hobby Occupation) scheme.
Dividing the costs.
If you holiday home is owned by a company, you will be able to divide the costs in any way between income and capital. This can provide useful tax benefits. If the property is bought for capital purposes, you will be able to divide the costs into income generating and capital elements. The capital element can then be written off at a rate of 30% per year. This will provide a tax shield as the expenditure is written off against income.
Leasing your holiday home.
If you plan to use your holiday home for more than 21 days in any year, it is more beneficial to lease it out than to sell it. If it is sold, you will be liable for CGT on the full gain. However, by leasing it, you will be able to claim back part of the rent received as a tax deduction against your income. The rent received will also be treated as incidental income and will not be subject to income tax. If the holiday home is leased for part of the year, you will be able to claim a proportion of the expenses incurred in owning and running the property back as a deduction against your income. This will provide a similar tax benefit to holding the property for rental purposes and writing off expenses against revenue.
To Sum up
Owning a holiday home in the UK can provide a range of tax advantages. By careful planning, you can take advantage of these and reduce your taxes.
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