Main Residence to Holiday Let

Dal_Whinnie

A friend has planning permission to build a new house in their garden and intend to move into it when it is completed. Because it is in a holiday area they are currently thinking about retaining their existing house and letting it as a holiday let. They are also considering giving their two children a share of the letting business. I am just thinking about the questions they need to ask and points to consider and have so far come up with the following:

1. Should they gift part or all of the house to their children?
2. Can the children share in the letting business without having any share of the house?
3. What structure should be set up for the letting business?
4. How will any subsequent disposal be treated for CGT?
5. Will gain be time apportioned (they have lived in it for more than 20 years) or can it be based on current value?
6. What impact will the new house have on the value and CGT of the existing house?
7. From an IHT point (as distinct to the letting question) would it be better to gift all or part of the house to the children now or on death?

silvercar

First question is how old are the children? Are they over 18? If they want to transfer ownership to under 18s it would need to be in the form of a trust is my understanding. Assuming they are in fact adults:

1. This has implications for their status as first time buyers and stamp duty.
2. They wouldn't have an automatic share of the rental income, though they could be paid for admin/ management time
3. Keep it simple, setting up a limited company comes with costs, paperwork and tax returns.
4. Rules can change in the future, but basically having had a long time as owner occupiers of their principal private residence the CGT on sale would be reduced and may well be zero
5. Time apportioned
6. No CGT on sale now as it has been their PPR for the whole time they have owned it, any delayed sale may risk CGT liability but the last 18 months are not considered and they have a CGT allowance.
7. Depends on numerous factors - size of their estate being the main one. If they gift now, they would need to survive 7 years and not retain any benefit in that time for it to be completely out of their estate. Consider also the stamp duty implications for the children, if they buy a home.

00ec25

2. No, not without being beneficial owners.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg11730
If you operate as a furnished holiday let they could of course be paid to manage it, however, if they are not owners, that could lead to questions over whether they are genuinely unconnected with you and are genuinely self employed. More likely is they would be regarded as your employees and you'd be required to pay them via PAYE and operate payroll software.
An FHL, as I suspect you know, operates under trading income rules, not under property investment rules. However, that does not remove the "need" for those drawing income from it to be entitled to such income, be they owners, or employees, or genuinely self employed "FHL servicing businesses"

3. each beneficial owner declares their respective share on their own tax return. It is not a "partnership", and you certainly do not want to set up a Ltd Co unless the property is mortgage free and you can gift it wholesale to the company and then incur the admin and extra costs of such a set up

4. depends if you retain a share of ownership. Each beneficial owner will be liable to CGT. if you remain a beneficial owner your share would be partially covered by private residence relief. Your kids would not. They would pay more than you in CGT if they are owners, but because they are connected persons, they would acquire it at its market value at date of gift, so their CGT clock starts ticking from that date, and their gain is from that value. Yours is not, your gain is time apportioned across entire ownership, subject to any relief

6. Obviously the value of the old house will be slightly reduced due to the reduction in its plot size. The old house is no longer home so of course is liable for CGT - time apportioned for your share as already explained. However, after April 2020 the final period is reduced to 9 months, not 18

other points already covered by silvercar

Dal_Whinnie

Thank you both for your replies. Just to confirm, the children are over 18 and both own their own properties. My friends have got a small mortgage which they will use to partially cover the new build costs. If they sell their current PPR then they would repay this otherwise they will retain the debt.

You mentioned Stamp Duty, which I hadn't thought about, are there any other aspects you can think of that they need to consider?

silvercar

My friends have got a small mortgage which they will use to partially cover the new build costs.

They will need to mortgage lenders consent to hive off part of the garden for the new build. The lender may want a valuation of the property with and without the land being hived off. They may want the mortgage reduced.

Tom99

They may not be able to keep the mortgage once it becomes a holiday let.

silvercar

Tom99 wrote: »

They may not be able to keep the mortgage once it becomes a holiday let.

Agreed, but I was thinking that the mortgage may be retained on the new house being built on the same land.

Either way the mortgage lender is going to have to agree.

Dal_Whinnie

I understand that any lender will have to be kept fully informed and may insist on full repayment. Assuming their is any choice then is there any advantage in retaining the loan against the existing property or transferring it to the new property or does it make no difference?

00ec25

Dal_Whinnie wrote: »

I understand that any lender will have to be kept fully informed and may insist on full repayment. Assuming their is any choice then is there any advantage in retaining the loan against the existing property or transferring it to the new property or does it make no difference?

although it is not techncailly correct to state that what a loan is secured on matters, in reality leaving the loan on the (now) FHL would make it a lot simpler when claiming the interest costs as part of the FHL profit calculation (subject to the mortgage interest 20% rate cap of course)