CGT Changes and Furnished Holiday Lets by Letting Focus

There is still a considerable clamour on the chancellor to amend his plans on changes to simplify capital gains tax to make it more palatable to businesses.
We will have to wait and see – but I don’t think much will change – as there will be too much political face to be lost if Darling changes things now.

Furnished Holiday Lets
One class of investors who lose out is people with furnished holiday lets. Unlike buy to let investors, who generally gain under the proposed move to an 18% flat capital gains tax rate, owners of furnished holiday homes will lose out.
This is because they are treated just like any other business and currently get a different more generous type of taper relief called Business Asset Taper Relief (as opposed to the “Non Business” version that applies to buy to lets).
With this only 25% of the gain was taxable after owning for 2 years or more – giving a higher rate taxpayer a rate of effectively just 10% to pay.
With the new flat of 18% rate, they will pay more from April 5th 2008.
Then again, there could be a compensating factor at work here too. As a result of the lower CGT rates on second homes, more people will buy second homes for themselves. This could increase the value of houses in rural and coastal areas - just those places where where there are many holiday lets.

ABOUT DAVID LAWRENSON and LettingFocus
We are LettingFocus.com - the property letting experts and I’m David Lawrenson, the author of “Successful Property Letting” - the UK’s top selling property and buy to let book for the last 3 years.
I have been a landlord and property investor myself for over 25 years.
At LettingFocus we offer independent unbiased buy to let information for investors at our seminars as well as one to one (or two) focussed consulting advice covering all aspects of being a landlord and investing in property.
Unlike many in the still largely unregulated buy to let and property “advice” business we are not linked to a property company, developer, estate agency or bridging loan provider and so can be relied on for unbiased and independent advice on where to buy (which areas), what type of property to buy, when to buy and how to buy property at a low price. I can also explain how to reduce the risk of getting a bad tenant.

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Capital gains tax changes who wins and who loses by Letting Focus

At a recent speaking engagement to a professional group of property investors I was asked who wins and who loses from Capital Gains tax Changes?
Well, let’s see.
Currently CGT for most investors is levied at 100% of any net gain they make after deducting buying and selling costs after deducting their £9,200 allowance if they sell within 3 years.
The charged rate is then 40% if they are higher rate taxpayers and 20% if basic rate taxpayers. However, something called Non Business Asset Taper Relief then came into play which means that after the first three years of owning a buy to let you get to effectively knock off 5% of any net gain.

Taper Relief
This then “tapers down” by further lumps of 5% each year, up to the 10th year of ownership so that by year 10, a maximum 40% taper is applied.
So, when you get to the maximum taper relief available of 40%, this means you would only be taxed at 60% of the capital gain.
If you are a higher rate taxpayer and pay 40% capital gains tax rate, the “effective” rate of tax you would pay on the gain after 10 years would be 60% X 40% = 24%.
If you are lower rate taxpayer you pay 60% x 20% = 12%
(To complicate matters, you should note also, that if you owned the property before 1998, for any period up to march 1998, you benefit from another sliding scale called “indexation allowance” which reduces the taxable gain by the rate of inflation up to 1998 but let’s not go there!)
That's the hard bit. Now to the easy bit!

New Regime for CGT
With Darling’s changes, (which take effect for asset sales after 5th April 2008) both these sliding scale CGT rates are to be abolished and replaced with a single CGT rate of 18% no matter how long you owned the property.
So, if you are an investor and pay tax at the higher rate of 40%, you are a clear winner as 18% is always less than the best rate you could have got under the old regime (i.e. where the property was held for 10 years or more) of 24%.
The biggest gainers of all are higher rate taxpayers who have held property for less than 3 years whose “effective” CGT rate will drop from 40% to 18%.
Even if you are a basic rate taxpayer, any significant gains you make could push you into the top rate of tax, thus meaning that the new regime may be better for you too.
If, however, you are a lower rate taxpayer and your gains would not push you into the 40% tax bracket, then you would be worse off under the new system only if you have held the property for more than 4 years. If you are one of these and you are thinking of selling, then do so now as you will pay more after April.

Second Home Owners
Second home owners – most of whom are higher rate taxpayers - are also big winners of course - and this change could make prices of properties in coastal and rural areas, particularly go up further.
Since most UK buy to let investors and second home owners are higher rate taxpayers, there will be a lot of people waiting until April before they complete on second property sales.
Of course, in general this change will make buy to let and second home owning more attractive still - and attract entrants into the market, thus possibly buoying up the housing market at a time when it looks shaky.
Judging by the amount of enquiries I now get from banks and building societies interested in my consulting services to help them improve their buy to let mortgage products, I think the buy to let arena is surely set to grow -and this fillip to tax will only help matters.

Furnished Holiday Lets
Finally, a footnote, the tax changes are not so good, however, for owners of furnished holiday lets. They will be worse off and I will look at this in the next blog.
Finally, tax is complicated, so if you are considering what to do, take advice from a financial adviser familiar with residential property taxes.

ABOUT LETTINGFOCUS.COM
We are LettingFocus.com - the landlords’ expert and I’m David Lawrenson, the author of “Successful Property Letting” - the UK’s top selling property and buy to let book for the last 3 years.
I have been a landlord and property investor myself for over 25 years.
At LettingFocus we offer independent unbiased
seminars for buy to let investors and landlords as well as one to one advice covering all aspects of being a landlord and investing in property.
Unlike many in the still largely unregulated and shark infested buy to let and property “advice” business I am not linked to a property company, developer, estate agency or bridging loan provider.
As such I am able to give honest, unbiased independent advice on where to buy (which areas), what type of property to buy, when to buy and how to buy property at a low price. I can also explain how to reduce the risk of getting a bad tenant.

CHECK OUT THESE PAGES AT OUR SITE LETTINGFOCUS.COM:
Our Events only take place twice a year.
For our NEXT SEMINAR AND NETWORKING EVENT for Landlords and Property Investors click here:
Next Property Investing Seminar and Networking Event
We have GREAT OFFERS for landlords too, Click here: Services and Products for Landlords to see our Landlords Resources (Useful Links) page. (Selling services to landlords and property investors and have a national coverage? You could be a partner, please get in touch!)
For general info on our SEMINARS AND CONSULTING click here: Property Seminars, Networking Evenings and Consulting
ONE TO ONE CONSULTING click here: Property Consulting
CLIENT TESTIMONIALS from past customers click here: Testimonials
BUY THE BOOK click here: Buy the Book at Amazon
THE HOME PAGE OF THIS BLOG click here: Blog
THE HOME PAGE OF OUR MAIN SITE click here: LettingFocus Home Page
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UK Holiday Lets - How Do I Invest by LettingFocus

Is it sensible to invest in holiday lettings?
The growth in UK second homes has meant that owners of property which is let for holiday purposes have also seen good price growth.
However, there are still many cheap and attractive pockets rural and coastal areas, so if you can spot an attractive area that has so far been overlooked by second home owners and which could be easily let to holidaymakers, then you could do quite well, not least because the tax breaks on holiday lets are very good.
HMRC classifies holiday lettings as a business, (not as unearned or investment income which is the way it treats longer term lets) but the rules are quite strict about what qualifies as a holiday let.
In order to be a holiday let, the property has to be furnished to a level suitable for normal occupation and available to be let to the public for at least 140 days of each year. In addition, it also must be actually let for 70 days and not let to the same person for more than 31 consecutive days in a seven month period.

Real Rents
The lets themselves must be real rents, so you have to charge market holiday let rates, even if you let to friends!
With a holiday let you don’t have option of going for a wear and tear allowance, as you would with normal buy to let (longer term lets), but you are able to claim all repairs, agency and advertising fees, cleaning costs, heating and lighting costs, insurance and the costs of decoration and interest on any loan.
Capital allowances on the costs of furnishings, fixtures and fitting can be claimed too.
If the holiday let makes a loss you can offset that against your other income. (With longer term buy to lets you can only carry forward and set off against future rental profits)
However, the really neat thing about holiday lets is that capital gains tax is much gentler than with longer term lets.

Business Asset Taper Relief
Since holiday lets are treated as a business, the taper relief used is the Business Asset Taper Relief Rate. (Long term residential lets have to use the less advantageous non Business Asset Taper Relief)
Business Asset Taper Relief is nil for properties held for less than a year, but then 50% if held for between one and two years and 75% if held for two or more years.
This means if you make a £100,000 gain, once taper relief is applied, only £25,000 is taxable. Once a couple applies their annual CGT allowances of £17,600 (£8,800 each) the CGT would only be paid on £7,400.
Compare this with Non Business Asset Taper Relief on normal buy to lets where the maximum taper relief is 40% - and then only after 10 years!
Also, just as with most business type capital gains, with a holiday let you can roll over all the capital gains onto another UK holiday let property as long as the full amount of the sale proceeds are rolled over onto the next property. (However, you must do this either less than one year before or three years after the sale of the first property.)
A standard buy to let loan will not be suitable because they the lender will require the property is let to tenants.

Mortgage Options are Few
Looking around, the number of players in the holiday let mortgage market is quite limited.
The Scarborough Building Society is one of few with a product.
Brokers are the best bet for arranging holiday home insurance cover. The internet has a long list of brokers specialising in this area.
To achieve success in this market, you have to buy in the right area. English Country Cottages says their average occupancy rate is about 22 weeks a year, so you have to make your money in a short season.
Also, the Chancellor did not give those juicy business tax breaks for nothing. This is a really hard business and the workload is high.

Standards Please!
Guests will expect a high standard of cleanliness and service. And things must be fixed promptly, so if you are not there to do it, someone else must be.
If someone else does all this for you, expect to see 20-35% disappear in agency and admin fees.
In addition marketing costs will be high, at least at first, before you can rely on word of mouth and repeat visits.
You will have to join a good website and pay to get in the latest guides. Budget to spend from £500 per annum for effective marketing.

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ABOUT US

LettingFocus.com are the experts on landlord issues and I’m David Lawrenson, the author of “Successful Property Letting” – which has been the UK’s top selling property and buy to let book for the last 3 years.

We help landlords and property investors make money in property by coaching them in ways that work, that are ethical and which involve minimal risk.
I have been a landlord and property investor myself for over 25 years.

At LettingFocus we offer independent unbiased buy to let advice for property buyers and landlords both on a one to one mentoring and coaching basis as well as through occasional group seminars.

Property syndicates and property advice in the UK is still largely unregulated and what counts as “advice” is too often more about making the promoter money than giving useful information to the investor.

With no link to property firms, developers or bridging loan providers, at LettingFocus, we aim to give unbiased independent advice on where and what type of property to buy for investment, when to buy and how to buy property at a low price.

We also show you how to manage tenants properly and in ways that take up as little of your time as possible.

Finally, we advise companies such as banks, local authorities and social housing providers with their landlord or buy to let facing strategy.

To JOIN our Free QUARTERLY NEWSLETTER simply send an email to david@LettingFocus.com - Please note we WILL NOT send spam or sell our mailing list to advertisers!

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