It’s Groundhog Day - For the fourth time in 12 months we have a budget to look at
Ok I’ll be Bill Murray and you be Andie MacDowell! Let’s examine the announcements from the latest budget that affect holiday home owners.
George Osborne produced a couple of quite radical measures which definitely qualify as the proverbial rabbits out of the hat, all the more surprising as we are nowhere near an election.
Sorry to sound like a broken record if you are a regular reader but holiday let owners should not be paying council tax. They should be registered for business rates and then apply for small business rate relief at 100% so pay nothing. This has been renewed in each autumn statement since 2009 when the relief was increased from 50%. From April 2017 the relief is being made permanent and the threshold doubled to £12,000 rateable value. There’s tapered relief then up to £15,000.
Making the relief permanent is fantastic news for holiday home owners though of course all tax rules are permanent until they are changed! I had always assumed that the relief would be reduced back to 50% at some point so I’m delighted to be proved wrong, the only possible worry now being that at some future point holiday homes could be exempted from the benefit in the same way as they are from some other business rules such as offsetting losses against other income.
A fairly large holiday home might have a rateable value of £2,000 so everyone owning just one property has always been covered by the previous relief level, however it hasn’t been made clear what the rules will be for owners of multiple properties. Previously if each of your other properties had a valuation less than £2,600 and added together they came under the £6,000 threshold you got relief on the highest valued one. I am guessing that the same rules will apply with the threshold increased to £12,000 so there may be a few owners who fall into this gap and gain relief where it was previously denied.
Capital gains tax
Once again George has really got it in for buy to let owners and probably more by accident than design second home owners who do not let or fail to get to the 105 days let threshold will also fall into this category. CGT has been reduced to 10% for basic rate taxpayers and 20% for higher rate payers but there is a surcharge for residential property pushing the rate back to 18/28%. Remember that the gain goes on top of your other income so when you dispose of a property almost all of it tends to fall into the higher rate and if you’ve had it a few years this can produce a very substantial tax bill.
Holiday Let v Second Home
This is probably a good time to summarise the cost difference between running your second home as a holiday let or locking it up and keeping it for yourself.
Let’s imagine a cottage that you bought for £200k and sold for £300k 10 years later. We’ll also assume that average gross rent is £20k a year yielding £10k of profit before finance costs so we’ll say £7k after tax.
Holiday Let: Second Home: 10 Year cost:
Rental income £7,000/year £0 £70,000
Council tax £0 £1,500/year £15,000
Capital Gains Tax 10% 28% £18,000
Now of course there may be more wear and tear on a holiday let but often empty properties need more maintenance as they are not regularly inspected or heated.
What we can’t put a value on is the contribution to the local economy through providing work and from guest spending as well as ensuring that local amenities are supported.