Holiday Home Tax & Finance 2016 Round up
If you are buying a holiday home the right planning can save £1,000s in the long term.
It’s been a strong year for sales of holiday cottages in Cornwall and I have had many conversations with potential owners looking for the best way to finance their property. Some are lucky enough to have the cash to fund the entire purchase but even then it isn’t a foregone conclusion that being mortgage free on your holiday business is the most efficient way to arrange things.
I haven’t practiced as a financial advisor for some time but I do keep in touch with my former colleagues and try to keep up with the state of the mortgage market so I’m able to help my owners where I can. Whilst the number of lenders who specialise in holiday home lending remains limited, we are seeing a lot more flexibility from lenders who allow clients to remortgage their current property to place a deposit towards or completely purchase an investment property. Furthermore, lenders are also far more flexible when lending for a second home and will allow occasional holiday letting using residential rates if you want the best of both worlds (letting income and use of the property).
Up to 75% of a holiday property is typically available and the loan will either be based on a client’s income or the income potential for the property. If you are basing the loan on the property’s income potential, lenders will use their own stress testing for justifying a loan and this ranges from 125 -200% of the annual mortgage interest. It’s interesting to note that most lenders work on gross rental income and given that a large chunk of this is taken up with the expenses of running a holiday home the calculation can actually be very reasonable compared to a normal buy to let.
Recent reforms to pensions have seen lenders become more flexible when lending to older clients. In the past loans had to be repaid by state retirement age but it’s now possible to run loans up to age 75 and some have even removed their upper age limit altogether to gain market advantage.
Whilst lenders aren’t allowed to place adverts in The Press stating they have loads of money to lend and not enough clients, an awful lot of them are cash rich or have too many traditional mortgages on their books and need to lend more in the investment sector to balance their risk books. Now is definitely a good time to be looking for a loan as interest rates don’t look like rising anytime soon and this definitely benefits borrowers over savers.
Arranging Loans For maximum Tax Efficiency
The simple rule of thumb here is that if you have borrowing on either your holiday home or you main residence you should maximise the borrowing on the holiday home as this will be allowable against tax. Note that the forthcoming restrictions on buy to let interest relief do not apply to holiday homes that exceed the availability & occupancy thresholds (210 & 105 days respectively). Even if this means that the business makes a loss you should still maximise this as losses are not lost- they carry forward forever and at some point should deliver a tax free income. See my previous article ‘Losses are not Lost’ at blog.abovebeachcottages.co.uk.
If the rate available to you on your residence is lower than that on the holiday home you’ll need to take this into account but the tax relief will normally more than make up for this especially for higher rate taxpayers. Put simply you should borrow as much as possible against your holiday home and pay off your residential mortgage with any surplus. Note that you can do this even if you have owned the holiday home for years as effectively you are paying yourself back the capital you invested in the first place so the loan will qualify.
Borrowing deposits or full finance against your main residence.
It’s fine if this is the only way for you to fund the purchase as long as you arrange things carefully at the start. Ideally leave the money raised by the additional loan in your solicitors client account and use it for the purchase straight from there. This will provide cast iron evidence that the funding was for your holiday home and you’ll get tax relief on the proportion of interest relating to it.
A Special Trick If You Already Have The Deposit
Let’s imagine you have £150,000 in the bank- perhaps you have received a legacy or sold another property and you also have a £250,000 mortgage on your residence. If you are planning to use the money as a deposit for a holiday home then make arrangements with your lender to pay down your mortgage then borrow the money back or pay off the mortgage and take out a new one if you can get a better rate. This means that the interest on the £150k on your residence now qualifies for tax relief- for a higher rate taxpayer paying 4% interest that’s worth £2,400 a year.
For Once Nothing To Report From The Autumn Statement.
In recent years the Autumn Statement has had more things affecting holiday home owners than the main budget and it is in fact to become the budget in future however there were no announcements directly relevant to holiday home owners.
Lets just summarise some of the key policy changes from previous statements, some of which are just coming into force now.
Small Business Rate Relief at 100% has been made permanent meaning that holiday lets will pay no business rates or council tax until further notice. We will watch developments with interest regarding the transfer of business rates receipts directly to local authorities. At the moment it seems they would have the power to reduce but not raise the rate but any control over relief would clearly make a big difference.
The biggest impact came from the 3% stamp duty increase for second homes including buy to lets and holiday homes whether qualifying as a business or not. It’s a chunk of money though for properties between £250,000 and £350,000 it actually amounts to part or all of the savings that came from the reform in April 2015. We saw a surge in the market up to April before the and a lull afterwards. A purchase is defined as being a second home if the name of any purchaser is on the deeds of another property in the UK so if a couple live in the house that belongs to one of them the other can buy a property in their name only without paying the extra tax.
In future Capital Gains Tax will be due within 30 days of completion of a sale rather than the current arrangement which could see you hanging on to the money for anything up to 20 months. This is not much of a surprise as ‘payment on account’ was introduced for self employed tax some time ago and it’s a logical extension of this principle. Presumably if you are a higher rate taxpayer you will have to pay at the higher rate regardless of any forthcoming change of circumstances. The good news is that this will not be implemented until 2019
Remember that qualifying holiday lets have the benefit of entrepreneur’s relief which means a flat rate of 10% on the gain rather than 18% or more commonly 28% as property gains tend to push people into the higher band anyway. This can be a very considerable saving on a property that has been held for a long time.
Overall with interest rates so low and potential volatility in other asset classes coming from Brexit and a Trump presidency a holiday home in Cornwall continues to be a solid investment that you can enjoy as well.