Tax on holiday home rental income

silvercar

I am unsure on the allowable expenses for a holiday home rented out.

The property is outside the EU, so it can't qualify as a holiday let. I understand that any rental income is potentially taxable but I can't find any guidance on what expenses are allowable given that it will be used some of the time by myself.

eg. in one tax year it is used by myself ( or family) for 8 weeks, let out for 12 weeks and empty for 32 weeks. So are all the expenses on the flat multiplied by 44/52 to find what is allowable? or 12/52.

Does it matter if I only use it myself when it would otherwise be empty - so no loss of rental income. Or does it make a difference if I retain it for personal use for certain weeks before offering it for rental?

chrismac1

This property income is treated as standard rental income, given that it does not meet the FHL tests. Hence the standard letting rules apply to it. The income is clear enough. In my view you should apply the "wholly and exclusively" test to rental expenses.

Expenses arising specifically for the 12 weeks of rental - marketing, agents' fees, cleaning and so on - should be claimed in full. Expenses which cannot be specifically attributed to those 12 weeks - mortgage interest, utility bills and the like - should be claimed pro rata to the weeks of the letting. So 12/52 in the example you quoted.

Wear and tear allowance is 10% of (gross rentals minus expenses normally borne by tenants but borne by you ie. utilities).

Personally I have not seen in tax manuals or on HMRC site a worked example for these circumstances, which are not that unusual but becoming more common as folk get properties in out of the way places, the recession bites and the FHL rules become stricter meaning many holiday lets no longer qualify for FHL tax treatment. So if anyone has found such a post, please put up a link to it!

silvercar

In trying to maximise expenses allowed, I would have thought that any expenses incurred whilst the property was available for letting could be included.

Trying to draw comparisons with a residential rental property (as the tax treatment is the same). Mortgage interest and agents fees would be allowed during a void, so they should be here??

Pennywise

silvercar wrote: »

Trying to draw comparisons with a residential rental property (as the tax treatment is the same). Mortgage interest and agents fees would be allowed during a void, so they should be here??

That depends on the reason for the void. If it were just a few weeks between 6 month tenancies, then clearly there is no problem in claiming costs during that period. But, if you deliberately didn't let it out for a few months so that you could stay in it yourself for whatever reason, or so you could renovate it or extend it, or whatever, then the costs of the void period wouldn't be allowed as they're either private or capital.

In the case of a holiday home, there is duality of purpose, i.e. personal use as opposed to business use, all in addition to void periods.

If the void periods weren't so extensive, then the argument wouldn't exist, so the question has to be asked as to why it is empty for so long? Is this a particularly unusual year? I.e. would it be let for longer in other years or would you use it less personally in other years? Is it located where the letting season is particularly short? If you didn't previously use it personally and this particular year was a one off, then maybe the costs of the void period would be allowed - they certainly would in a year when there was no personal use.

You could get bogged down into arguments about your intent when you bought the property - i.e. was it primarily for you to use as a holiday home with costs supplemented by renting it out for a few weeks, or was the intent to rent it out to make a profit meaning that your occasional stays are incidental.

Given the relatively few number of weeks that it is let to other people, I think the tax inspector could draw a conclusion that your prime motivation for buying it wasn't as an investment, but as a holiday home for you, thus the tax relief being limited to the number of weeks let being used as a proportion of expenses to be allowed rather than the number of weeks used personally as the proportion to be disallowed.

Another relevant factor could be whether you or your family are using it yourselves in prime weeks of the season thus preventing it being let out on a commercial basis, or whether you're using it off peak at times when it wouldn't be let anyway.

chrismac1

Good points by Pennywise. Note also that the specific country and local market conditions are a factor right now. For example, I have clients with holiday "homes" in Bulgaria. It is clear to me - and given that they both have full time jobs in the UK, should be clear to HMRC - that when they were bought in 2007 and 2008 - the prime purpose was to cash in on the booming conditions for holiday lets at that time and place.

Fast forward to 2012 and anyone who thinks the UK is in bad shape should be out there! The properties can only be let for about 8 weeks per year - and at silly prices - and the capital value has plummetted 80% so not really worth selling up either.

In these cases I have no qualms about having to defend the tax returns submitted, as I believe there is strong evidence to support the trading intention. Google "badges of trade" for further support in your case - the mere fact that someone ends up being a not very good business person does not stop them claiming relief for trading losses.

silvercar

Very interesting points, thank you.

The property is nearing completion, so personal use patterns have not yet been established.

The intention to buy this place was made on the basis that it became affordable if we let it out on a regular basis, so it was a commercial decision. Ideally we let it out as a short term let off season and holiday rentals in peak season, but time will tell. I have had some inquiries through word of mouth, even before it is complete so I am optimistic.

jimmo

Hello, stranger, it seems like quite a long time since you were last on this particular forum and its nice to see you here again.

I fear you may have muddied the waters by labelling the property a holiday home when, in tax terms it is no such thing because the FHL rules cannot apply.

Having said that, the first thing I think we should look at is void periods.

Take a look at “Property closed for part of the year” at PIM 4120.




http://www.hmrc.gov.uk/manuals/pimmanual/PIM4120.htm

Even speaking as a taxman, I would interpret “
provided there is no private use.” as referring to the void period rather than a whole tax year.

Lots of FHL cases involve caravans on controlled sites which are actually closed over winter and early spring so that during the closed season absolutely no-one can occupy the caravan and it would be totally unreasonable to assert that the void period constitutes private use or dual purpose use.

Therefore I would have accepted that if the owner of the caravan used it for 2 weeks a year during the open season and it was either available for letting or subject to enforced closure for the remainder of the year, the disallowable expenses would be 2/52.

Others own “holiday cottages” where, effectively, if the cottage is closed to letting over winter, there is nothing to stop the owner using it as a weekend retreat and the owner actually did so, even for only one weekend, I would argue for duality of purpose for the whole of the closed period. There the negotiations would begin.

Your post at # 6 actually gives your ideal argument against me.

One way or another you intend to make the property continuously available for letting albeit subject to some private use.

As chrismac1 said, as the property cannot possibly qualify for FHL treatment, you are subject to the normal rules for lettings businesses.

It follows that your are subject to the normal business rules about private use.



http://www.hmrc.gov.uk/manuals/pimmanual/PIM1103.htm



http://www.hmrc.gov.uk/manuals/bimmanual/BIM37000.htm

silvercar

:wave: hi jimmo.

Those links provide interesting reading, not least applying the concept of duality.

The property (it's an apartment), would be available all year, so there may be unlet and empty times, there may be times when we visit because we know it would otherwise be empty and there may occasionaly be times when we book it for ourselves at peak times, if only to book cheap flights in advance.

It will also be managed all year, as required by local law for unoccupied apartments, so the management fees will be higher for a property that is let than if it was only for our personal use. I'm assuming that the extra could be an expense.

To complicate things further, the borrowing to purchase is coming from our residential mortgage through our offset facility.

Oh dear, this is going to give me a headache, I'll need a holiday to recover.

One particular question,

On reading this:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM37610.htm

It seems that any dual purpose visit would not be an allowable expense. We intend to visit before it is available for letting in order to inspect and furnish, would the costs of that visit ( flight, hotel, food etc) be allowable on the grounds that the purpose of the visit is to prepare the property for letting, or not allowed on the grounds that we are also preparing it for when we would stay ourselves ( if it was argued that this preparation visit would be a few days in an area we clearly like, in a hotel etc. I would argue that we clearly wouldn't take a holiday to somewhere where we can soon stay free.)

jimmo

Hi silvercar,

It may not be the correct use of the English Language but I think of a “void period” as one in which the property is neither occupied nor available for letting and, on the basis of what you have said, there will be no “void periods”.

At any given time the property will be:

1) occupied by you (or family) for your own holidays (non-business).

2) occupied by you for lettings business purposes (business).

3) occupied by customers or available for letting (business).


1) Non Business Use.

Whether your non-business occupation is planned (pre-booked) or opportunistic is not relevant. It is a straightforward fact that at any time you occupy the property for non business purposes that is non-business use.

2) Own Occupation for Business Purposes.

In order to try to follow the order of your questions I will come back to this later.

3) Occupied by Customers or Available for Letting.

Nothing more to say about that.

With regard to management charges the general principle followed by HMRC is that you should normally apportion all expenses for the year in the ratio of business use to non-business use. That, of course, is not strictly correct but, on the basis of some you win, some you lose, HMRC is normally happy.

However, if you take one specific item of expenditure out of the accepted norm I would take the view that you are upsetting the balance and consider whether to insist that you follow your chosen principle for every class of expenditure.

Turning now to the borrowing I have no experience, personally or professionally, of offset mortgages so will not comment on that.

The basic principle when you borrow money is the purpose of the loan rather than the security used to obtain the loan.

The standard examples are here, particularly Example 2




http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

As I remember it, on this forum jimmo the taxman has taken a more generous approach than the accountants.

Turning now to your final question, and duality of purpose you are buying a property, presumably still under construction and your first visit includes inspection of the finished product. That, to me is part of the buying process, not part of the lettings business so I would argue against you.

Now, if you made one trip to inspect and made other trips to furnish / make ready for letting I would certainly argue against the inspection trip but I am not so sure regarding the others.

Your argument would be that those trips would be the lettings business equivalent of pre-trading expenditure.




http://www.hmrc.gov.uk/manuals/bimmanual/BIM46351.htm

It seems that, travelling and subsistence expenses aside, any other expenditure you incur will be capital in nature, not revenue. However, travelling expenses are revenue expenses and, on balance, I think they will be allowable as pre-trading expenditure.

Having said that I also find it easy to believe that some of my former colleagues would try to identify travelling expenses incurred in the course of making capital expenditure as an integral part of that capital expenditure.



Once the property has been let there is nothing wrong with you visiting the property and even staying there purely to maintain it such as redecoration.

Looking now at your link to BIM37610 I have to say that on the limited amount of detail available a taxman would, or should be, suspicious of a businessman, having no business dealings with either country takes his wife on a visit to the USA and Canada to attend a couple of conferences in an unofficial capacity. We don’t know, but I would suspect that the businessman maybe spent a maximum of half a day at each conference in the course of a 2 or 3 week visit. That would certainly be enough to justify an Enquiry.

Your own case is very different. There is a clear connection in the sense that you will be travelling to the property which is your overseas lettings business.

If you go for a week to redecorate, spend the equivalent of a normal week’s work, say 40 hours actually redecorating but, using flexitime, happen to spend a couple of afternoons on the beach, the purpose of the trip is business and the personal benefit is purely incidental.




http://www.hmrc.gov.uk/manuals/bimmanual/BIM37400.htm

On the other hand, if you go for a week to sort out a stuck gas tap you wouldn’t be able to use Flanders and Swann to justify booking a week for what should be a one day job.




http://www.nyanko.pwp.blueyonder.co.uk/fas/anotherhat_gas.html

I feel pretty confident you know this already but, in tax terms, your foreign lettings business is completely isolated from any other income streams and losses can only be carried forward to be set against future profits from the same foreign lettings business.




http://www.hmrc.gov.uk/manuals/pimmanual/PIM4703.htm

I don’t know whether you anticipate making significant taxable profits in future years from this venture, in which case your concern about the finer details will be justified, or whether you could be justified in taking a more pragmatic approach and not claim anything which may be a bit iffy because that should keep the taxman off your back.

silvercar

Jimmo, thanks for your detailed response.

I don’t know whether you anticipate making significant taxable profits in future years from this venture, in which case your concern about the finer details will be justified, or whether you could be justified in taking a more pragmatic approach and not claim anything which may be a bit iffy because that should keep the taxman off your back.

I would be happy to basically take (if we used it personally for say 8 weeks) 44/52 of the mortgage, 44/52 of the agency, furnishing, utility costs etc as business expense and put that against the rental income, if that kept the taxman happy. The thing is that we won't know if a taxman is happy until they have investigated our accounts. If we are going to be subject of an investigation then we may as well fly out there to change a washer etc!

I would have expected that the taxman would look suspiciously on the amount of time it is actually let in deciding whether the voids can count as available. If it was only let a few weeks in the first year as the business became known, would the taxman query 44/52 of the expenses being attributable to letting? I suppose if the income is small it doesn't much matter.

I know your specialist area is CGT; we have no sale plans on the horizon.

jimmo

I appreciate what you say about Self Assessment. I am not aware of HMRC’s present-day risk assessment processes and, even if I were, I would not be comfortable sharing the information.

So I have tried to work on the basis of principles

If you told me on here that for a given tax year the property was occupied by yourself and family for 8 weeks, actually let for 20 weeks and unoccupied but available for letting for the remaining 24 weeks I would happily say that you are entitled to claim 44/52 of the annual revenue expenditure because I believe you.

In work, if we cut out the pretty language, my job was to suspect you and to look for clues or evidence to indicate that something may be amiss.

Now, if we concentrate on the 24 weeks where you said that the property was unoccupied but available for letting could I cast doubt on that?

In principle, an Enquiry is simply a check on your Return so I can quite easily call for your business records and business bank accounts.

I have never done it, but given that the let property is outside the EU, I would feel justified in calling for your passport as well.

In the first instance I would probably be looking for evidence that you were actually outside the UK for any of those 24 weeks.

Then I would look for evidence of you obtaining foreign currency or otherwise spending money during your journeys to the particular country.

That might well entitle me to call for your personal bank accounts and credit cards and might point to other occasions of obtaining foreign currency not consistent with your declared income and expenditure.

Whilst HMRC are pretty fond of saying something along the lines of the honest taxpayer has nothing to worry about I don’t believe that is true. If you are perfectly honest but clumsy in your record keeping the taxman might be an absolute nightmare to deal with.

If I recall correctly you are ex Treasury and, rightly or wrongly, that conjures an image in my mind of someone who wants to get it absolutely right.

Also its quite nice that you remember that I was a Capital Gains specialist at HMRC but it is not relevant to your problem.

Self Assessment is a very different beast to the Income Tax system to the one that lasted for most of my career and, in my view, your priority should be to minimise the chances of an Enquiry.

There are arguments for and against claiming for your trip to inspect the finished product / preparing for letting. It’s a definite no for Capital Gains Tax.




http://www.hmrc.gov.uk/manuals/cgmanual/CG15251.htm

It’s a maybe against letting income but only you can judge whether claiming for something which is a bit iffy is worth the risk of triggering an Enquiry.

I wouldn’t do it but I am not you and I have no idea how much profit you anticipate making in the future.