switching from btw to holiday let (cgt)

piggo

I hung on to my first London flat and have rented it out for the last 15 years. It's very close to where I live now. I am thinking of switching it to a holiday let via airbnb as I think I'd enjoy the process and also increase my income.

My question is, will this change my capital gains tax situation? As I've owned the flat so long I imagine I'll have a very hefty bill when/if I do sell. And is there anything I should do before I make the change?

Thanks for any opinions.

Pennywise

Can't see how it would change the CGT position at all. The only thing that would change it would be to live in it yourself. Moving from BTL to Hol Lettings doesn't have a CGT impact.

piggo

Okay, thanks. I read an article that said the CGT would be 10 per cent on a holiday let, so lower than a btl, but I'm a bit blank on the whole subject.

chrismac1

Ignore the previous advice, albeit the only time in about the last 5 years when Pennywise has been anything other than on the money with her advice. Furnished holiday lets do indeed attract something called Entrepeneur's Relief, so if you run a qualifying FHL for 3 years and you've owned it for 10, then the CGT rate is:

3 years at 10% and 7 at 28% = 22.6%.

This assumes you are on the higher rate of 28% for the gain. Because it has a hybrid status in UK tax law between being seen as property income and trading income, FHLs have a number of other tax advantages. As I am based in the Lake District I do lots of these and my website has quite a bit about it. if you want links to the relevant pages please PM me the site rules on self-promotion prohibit me just pasting links in this thread.

chrismac1

The relevant legislation is TCGA 1992, section 169.

piggo

Thanks very much, Chrismac1. I think I know you already actually and I'm going to email you tomorrow.

Pennywise

Sorry, Chris is absolutely spot on (as usual) that it will qualify for entreprenneurs relief. I've no FHL clients so that had passed me by.

However, better than that, I find myself disagreeing with Chris that you have to time apportion the gain. My understanding of ER is that only the final period of ownership/use matters. So that if it's used as a FHL for more than the qualifying year and sold within the time limits prescribed, ER at 10% would apply to the whole gain. My understanding is supported by an article on the taxation website:-

http://www.taxation.co.uk/taxation/Articles/2014/11/11/332292/too-good-be-true

chrismac1

Admittedly I have not had a real-life case where this issue was going to affect the tax due, Pennywise. I think you are right, the only need to time-apportion is when there is an associated disposal, such as where the property was rented to a company which did the trade.