Month: August 2020

Your Guide to Furnished Holiday Lettings

2 min read

Much of the country is holidaying in the UK due to the current uncertainty around foreign travel, which has led to increased rents for UK furnished holiday lets (FHL). This article looks at the tax benefits of investing in such properties.

What is a Furnished Holiday Let?

In order to qualify a property should be fully furnished, commercially let and satisfy all of the following:-

Availability – It must be available for letting as furnished holiday accommodation for at least 210 days in the year.

Letting – It must be let as furnished holiday accommodation to the public for 105 days a year. You cannot include long term lets of more than 31 days.

Pattern of occupation – The total days where lettings exceed a continuous 31 days cannot exceed 155 days.

It is possible to average the days across properties where you have more than one FHL and you can make a period of grace election in certain circumstances when you have not quite satisfied the tests.

Income Tax

Capital allowances can be claimed on furniture and furnishings. You cannot claim relief on the original purchase of these items for ordinary residential lettings. There is greater flexibility for splitting profits with a spouse compared with ordinary residential lettings.

A significant advantage of FHLs compared with normal residential lettings is that there is no restriction on tax relief for interest payments for higher rate taxpayers.

Capital Gains Tax

Disposals of FHLs can qualify for Entrepreneur’s Relief which are taxed at 10% as opposed to the normal 18%/28% for residential properties. Gifts of FHL are deemed to take place at market value for capital gains purposes. An individual gifting a FHL can claim hold over relief so that no capital gains crystallize at that time.

This can be particularly beneficial for passing a FHL to the next generation as it is unlikely that a FHL will qualify for Inheritance Tax business property relief.

Capital Gains Rollover Relief is available where proceeds from the sale of a business asset are reinvested into another business asset. A FHL is a qualifying business asset. At Loucas, we help clients with a wide range of business interests including furnished holiday lets (FHL).

If you are considering buying a FHL or would like to discuss an existing property or portfolio, Loucas would be happy to advise on the matter.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Employee Ownership Trusts

3 min read

Employee Ownership Trusts (“EOT”) were first introduced in 2014 to facilitate more businesses being wholly or partly owned by employees.

There are some generous tax breaks on offer to encourage business owners to consider the EOT model.

What actually is an EOT?

A trust is set up which will hold all or some of the shares in the company. In order to benefit from the tax breaks the trust must own more than 50% of the shares in the company.

The trust will be operated for the benefit of the employees of the company. The trust is run by its trustees, which could include members of the management team, but given that its purpose is to hold the directors to account, it should be sufficiently independent to enable it to do this. It is necessary to demonstrate to HM Revenue & Customs that control of the business has passed to the EOT and having the trustees dominated by the original shareholders /directors would make this very difficult.

Employee Ownership Trust Model

How does it work in practice?

For new businesses, the EOT model could be put in place from the outset. For existing businesses, the shareholders would sell all or some of their shares to the EOT.

An independent market rate valuation of the business should be obtained which would set the sale price of the shares.

The company would make a contribution to the trust enabling it to pay for the shares. Depending on the funds available, a loan may have to remain between the trust and sellers which would be repaid over a period of time as the company generates future profits.

It may be possible for the company /trust to raise finance to help pay for the shares over a shorter period. The original business owners, post disposal, are able to retain some ownership in the business, keep their posts as directors and also receive market rate remuneration packages.

The company will continue to be run by the management team on a day to day basis, although they will now be answerable to the trustees of the EOT.

Tax breaks

Shareholders are able to sell their shares to the EOT free of Capital Gains Tax. With the recent reduction in Entrepreneur’s Relief this is even more attractive.

Income tax free bonuses of up to £3,600 per year can be paid to each employee.

What are the benefits of an EOT?

There are a number of benefits for the different business stakeholders.

Existing Business Owners

  • Capital Gains Tax free
  • Ready and willing buyer for the business
  • Reassurance that the business will continue as a going concern
  • Able to retain some ownership in the business

Employees

  • Tax free bonuses
  • A sense of ownership

The Company

  • An engaged workforce
  • Ensured long term future
  • Can continue with minimal disruption
  • A more innovative and forward thinking culture

The employee ownership model may not be suitable for all businesses, but it is fast becoming a popular choice for businesses who recognise the value of their most important resource.

An EOT is just one type of employee ownership model and other options such as share schemes should also be considered.

If you have any questions, our team of expert Accountants would be happy to assist.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Selling Part of your Garden

2 min read

Pressure on local authorities to increase the housing stock in the UK has meant that more and more home owners have had success in obtaining planning permission and selling part of their garden to a developer or developing the land themselves.

The tax implications of such transactions are not straight forward. One needs to consider whether the transaction is a capital transaction or if it constitutes a trade and is therefore, at least partly, liable to income tax.

Trading or Capital

Normally HMRC will accept that the transaction is a capital one, if the only way you have enhanced the property is by obtaining planning permission.

However, if you purchase the property with a view to making a profit on the sale of the garden then HMRC would argue that it is a trading transaction and liable to income tax.

Similarly, if you develop the land yourself or are entitled to a profit share on the eventual sale of the developed property, you would be deemed to be trading and at least part of the profit will be liable to income tax.

Principal Private Residence (PPR) Relief

If the transaction is capital in nature, then it is possible PPR relief is available. PPR relief allows gains on the sale of the majority of main residences to be free from tax entirely. You can sell part of the garden and still qualify for the relief.

The relief extends to land of half a hectare (including the plot of the dwelling house), but this can extend to a larger area where it was required, for the reasonable enjoyment of the residence.

Therefore, if the garden being sold has been used as part of the residence and is within the half a hectare, it should qualify for PPR and no tax would be payable on disposal.

If it is outside the half hectare, you would need to be able to show that the larger grounds/garden were necessary for the reasonable enjoyment of the property. This could be difficult to prove as the fact that you are selling the garden separately from the main house would indicate it was not required for the reasonable enjoyment of the property.

However, there could be circumstances where you had to sell the land, for example out of financial necessity, and relief may still be available in this scenario.

How we can help

If you have any questions, our team of expert Accountants would be happy to assist.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.