Council Tax

The amount of council tax you will be required to pay on your holiday let property will depend very much on the area your property is in and the authority it is under. In some areas, owners of second properties are allowed the luxury of a 50 per cent reduction in council tax, while others are required to pay 90 per cent of the full cost.

Whatever the charge, you will need to make sure that you have sufficient funds to pay this tax. You will be required to pay council tax every month, regardless of whether your property is being let or not.

At the time of writing, if your investment property is available for holiday letting for 19 weeks or fewer per annum, you will be required to pay council tax. If it is available for letting for 20 weeks or more per annum, you will be required to pay business rates.

If your property is in an area where council tax on second homes is high, or has recently been increased, you will probably benefit from paying business rates as these often work out cheaper, and in some cases councils are granting 50 per cent small business relief. In order to qualify for business rates your property must be available to rent for a minimum of 20 weeks per annum, otherwise you will fail the Inland Revenue’s tests and will not be eligible to be treated as a business and thereby lose out on a huge amount of valuable tax breaks.

Value Added Tax

The threshold for VAT is currently £60,000. If you have several properties available for letting, you may well breach this threshold. However, if you are only intending to buy and let one property, it is highly unlikely that you will exceed the £60,000 limit.

It is vital that you seek the advice of an accountant if you are in any doubt whatsoever about the implications of VAT on your property.

Capital Gains Tax

When you sell a property, which is not your family home or principal private residence, then in general you will be liable to pay capital gains tax on it. However, nothing is ever simple when it comes to taxation and the situation can change from one year to the next and each individual Person’s tax position can be very different., You would be well advised to seek the advice of an accountant for clarification of your own personal position and liabilities.

Although at the present time, capital gains tax is payable on investment property which is not your principal private residence, there are still ways of reducing your liability. It is vital that you ensure that you enjoy your annual exemption limit, which doubles for a married couple, if the property is in joint names. Unmarried couples can choose a main residence each and benefit from the annual allowance this way. You may be eligible for additional relief if the investment property has ever been used as your main residence.

Inheritance Tax

Properties that are used solely for holiday letting will probably qualify as business assets with regard to inheritance tax. At present (2006/7), inheritance tax is charged at 40 per cent on the amount of the estate valued over £285,000; however, if the property qualifies for exclusion through being a business asset, then the relief is 100%. Although it is not a guarantee that all holiday letting properties are excluded from business asset relief, the Inland Revenue Advanced Practice Manual suggests that where a property qualifies as a business, relief should be granted.

Taxable Profit

If you own a property in the United Kingdom which you let out, you can deduct certain expenses and tax allowances from your rental income in order to work out your taxable profit, or indeed loss. If you own several letting properties, you can pool the income and expenses together.

If your property keeps to the ‘rules;’ listed below, which are known as ‘qualifying test’s, then the rental income you receive from your holiday home in the United Kingdom may be treated differently, for the purposes of tax, to other rental income.

In order for your property to qualify as a ‘holiday let’, it must:

It is worth knowing that if you meet all the above qualifying tests in a seven-month period of each year, there are no restrictions on longer lets for the remaining five-month period. You will be able to let your property for whatever length of time you wish in the remainder of the year. However, you must be aware that these lets, if over 31 days, will not count as holiday lets.