Holiday lettings are a major industry in East Anglia. In many cases, planning permission will have been given for residential use restricted to holiday lettings, or at least subject to a condition that for part of the year the house or cottage must not be occupied.
All the usual rules apply; for example, you must make sure that your insurance policy covers holiday lettings; you must be very careful to live up to your advertising; and you must get your booking arrangements right. Anyone who has let holiday accommodation will be familiar with the guests who book and then failed to turn up, or who arrive but have not paid, or the leave just before the end of the week with some complaint wanting a refund. Equally, holidaymakers will have visited accommodation which is not ready for them, or is not up to standard.
The critically important point to realise is that letting holiday accommodation is a business and must be treated as one. A professional outlook not only avoids problems and increases visitor numbers, but can also provide some tax benefits.
What does the tax man say?
For tax purposes, the heart of the matter is whether you are running a business or simply owning an investment. The Revenue are very reluctant to accept that letting a cottage is a business (which carries various tax reliefs) as opposed to a property investment, unless you have convincing evidence.
There are specific reliefs for capital gains tax (such as rollover relief and entrepreneurs relief) provided that the property is available for letting and actually let for specific periods of the year.
For inheritance tax, however, there are no such reliefs. If you want your holiday cottage to qualify for tax exemption (100% business property relief) on your death, then you have to be able to demonstrate that you have been running the cottage as a business and not just as a landlord.
In a recent case the executors of Mrs Pawson, who co-owned a bungalow in Thorpeness, persuaded the Tribunal the letting of the holiday cottage had been run as a business. In the light of a number of previous cases, they may have been lucky, and indeed this case could go to appeal and be reversed.
What do I have to do to keep on the right side of the tax man?
If you want to be able to claim inheritance tax relief on a holiday cottage, you must have done much more than carry out repairs and decoration, take bookings, and greet the guests. Any landlord would do those things.
Any, and preferably all, of the following will be very helpful to your case:
- you do all the laundry and provide clean sheets;
- you make up the beds every day;
- you provide telephone and television;
- you give the guests advice on places to visit and local activities;
- you provide some form of catering.
It may not be possible for you to deal with the provision of catering, but if you can it is enormously helpful in any discussion with the Revenue. Even if you do not offer any meals, you might be able to provide a packed lunch now and then, or at least you may offer to buy a hamper of selected items to have ready for the guests when they arrive, which of course they will pay for.
When you have done all these things, you need to make sure they are reflected in your advertising and in your paperwork so that you can demonstrate you have gone far beyond the work of an ordinary landlord.
Is there anything else I need to know?
People often think of holiday lets as an extension of their own home. If you’re just letting a friend stay as a guest in a second home they may be but, as demonstrated above, if you want to take advantage of the available tax breaks they must be run as a business. With that comes a whole raft of responsibilities which are often over looked. Here are a few questions to help:
- Does your mortgage permit holiday lets? If you don’t have permission you may be in breach of your mortgage and need your lender’s consent.
- Do you have the correct insurance to cover other people being in your cottage? An ordinary household policy is unlikely to cover you. There are specialist brokers who arrange public liability, theft, damage, contents and lost rent cover for holiday lets.
- Do you make your holiday makers sign a contract or letting agreement? If not you could be left with squatters claiming to be tenants.
- Do you need an energy performance certificate? The answer is “yes” if the holiday maker has exclusive use of the property and it is rented out for more than four months a year.
- If the holiday home is co-owned e.g. with friends or family, have you considered the shares in which it is owned and what will happen if someone wants to sell their share? You will need a Declaration of Trust setting this out to help prevent disputes.
- Have you checked the furniture in your holiday let to see that it complies with the fire safety regulations? Unfortunately, the regulations apply as much to holiday lets as to longer term lettings. For help and guidance see the Department for Business Innovation & Skills web site: www.bis.gov.uk/files/file24685.pdf