Should l I stay or should I go now…?

Did you know that the world’s largest beach ball was made in London, had a diameter of 20m and was carried down the Thames on a barge to promote the new Baywatch movie in 2017? 

I have always been excited at this time of year as the lure of summer holidays and beach balls, on sandy far away shores, gets closer and closer.  But, when considering what to do for this year, the words of the song from The Clash ‘Should I stay or should I go now?’ wiggled their way into my mind, sang along in my head and made me smile all day.  Never was that lyric more apt than for now; and yes, for all those avid Clash fans, I know I have taken that phrase somewhat out of context!

Unsurprisingly, with many others also considering their holiday options for now and the future, the staycation decision has also seen a knock-on effect in the number of properties being purchased as private holiday homes or buy to let homes in destination locations. 

However, I was astounded to learn that it’s not just places such as Devon and Cornwall that have seen a dramatic uptake in the staycation trend; but that my home county of West Sussex had an increase of 87.44% in staycation bookings, and Wilshire has also seen a 343% increase in popularity since the pandemic struck.  Wow.

So, could now be a good time to purchase a staycation property?  From a tax point of view, depending on whether the property is for personal use, or to be used as a Furnished Holiday Letting (FHL) the rules, reliefs and taxes you have to abide by and pay, differ depending on circumstance.  So, here are a few of the pros and cons to get your thinking process heading in the right holiday direction.

Firstly, to qualify as a FHL, the property can only be located in the UK, EEA and a couple of smaller countries, and must be furnished sufficiently to allow for normal occupation.  Properties outside these locations including the US, cannot have the FHL status.  And, strange as I feel having to say this… but it is an actual rule I promise… visitors renting the furnished property, must be allowed to use the furniture in it!   

In addition, the property must be commercially let, which means let in order to make a profit for a minimum of 105 days in a year.  So, loaning it to friends for free does not therefore count as valid days, and even if it is only let out of season to cover the costs, the property will be deemed as commercially let and taxed accordingly. 

However, there are also tax advantages that can make owning a FHL appealing too.  When letting a FHL property you are able to claim Capital Gains Tax reliefs for traders – that is the Business Asset Rollover Relief, Business Asset Disposal (formerly known as Entrepreneurs’) Relief, the relief for gifts of business assets, and a relief for loans to traders.  In addition, you can also make use of the plant and machinery capital allowances to cover your purchases for furniture, equipment and fixtures; and any profits made can be counted as earnings for pension purposes. 

But to qualify for these, the profit and loss from your Furnished Holiday Letting must be calculated separately from any other rental business.  And, if your property is only let for part of the year due to a lack of customers, providing you are not residing in it yourself, you can deduct all relevant expenses such as insurance and loan interest for the whole year.  

For slower years, where the property is not let for the required period of time to qualify for FHL, you may be able to utilize the ‘averaging’ or ‘period of grace election’ (POGE) allowances.  Understandably, in light of the recent lockdowns, there is some confusion about the POGE rule, which state that the property ‘must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year.’  Clarification of the ‘unforeseen circumstances’ clause, is being sought from HMRC by many, to ascertain whether lockdown qualifies for this. 

One response online is an example that explains the situation clearly and it says:  If the FHL is advertised on a holiday let booking platform for more than 210 days, and an unforeseen circumstance i.e. a travel ban, reduced the actual time people could potentially book the property for to 190 days, but the property was still only actually let for 70 days, you could use POGE.  But to do so, you must be an existing FHL, or have qualified for the period of grace election the previous year.  However, if you took advantage of the lockdown to renovate the property, meaning that it could not have been let as accommodation during that time, this would not qualify for POGE.

When a property ceases to be a FHL, whether it is sold, used for private occupation, or does not meet the letting time qualification criteria, there will be tax consequences.  Associated tax reliefs will no longer be valid and it will be necessary to work out the balancing allowance, or balancing charge for capital allowances.  Capital gains tax reliefs will also be affected, so if you need help to sort through the complex reporting requirements, please ask.

I must confess, I was wondering whether the staycation thing is just a means to an end, whilst restrictions are in place.  But, I then saw some research from 2018 showing that 66% of the UK’s holidaymakers, chose to holiday in the UK rather than going abroad.  So, perhaps it has always been more prevalent that we knew, but because it was not such a big thing, was never as widely reported on.

For those that do decide to purchase a staycation property, as you know you can always sell it later down the line.  But, please take into account that with the steadily increasing house prices not looking to abate any time soon, you do need to factor in that all homes are subject to capital gains tax, and it’s just your principal private residence that you get tax relief on.  As a result, you may have to pay more CGT on the property, but conversely, you will also have a good return on your investment and more cash from the sale in your pocket too.

Last-but-not-least, please don’t forget the changes that came into force in April 2020 which mean that you must report and pay any tax due on the sale of a UK residential property within 30 days of selling it.  Sellers need to do this via a Capital Gains Tax on UK property account.  As you canimagine, this is not something that can be set up overnight, and so needs proper planning – not to mention the impact on your cash position.

You may not be heading off for a mini-break to Rome, but we will happily be your tour guide when it comes to the ins-and-outs of your holiday home.

About the Author
Carolyn Burchell trained with the UK’s top firm of accountants, qualifying as a Chartered Accountant in 1996. Carolyn moved into industry in 1997 working on a number of commercial projects and managing Treasury and Credit functions before taking a career break to have a family. In 2009, Carolyn decided to enter into the stringent Chartered Institute of Taxation examination programme, qualifying as a Chartered Tax Adviser in 2012.

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