30 May 2017

VAT is the difference between residential and holiday lets

Before you decide to let out a holiday home, there are a number of VAT issues and opportunities that should be carefully considered.

With the tax benefits of the wear and tear allowance and mortgage interest relief on residential lets diminishing, many people have been questioning whether buy-to-lets are still worth it, and whether holiday homes are the new buy-to-let. The main difference between residential and holiday lets is that residential lets are viewed as investments, whereas holiday lets are viewed as a trade. This results in tax benefits, such as allowing mortgage interest to be deducted from income as an expense. It’s common for farms and estates to have cottages, converted barns and steadings within their grounds, which can be an ideal use for furnished holiday lets. Before you decide to let these out as holiday accommodation, however, there are a number of VAT issues and opportunities that should be considered.

VAT on income

HMRC applies the same VAT liability as hotels, inns and B&Bs to furnished holiday let properties. While the supply of residential accommodation is exempt from VAT, the supply of holiday accommodation is liable to standard rate VAT at 20%. If a business exceeds the VAT registration threshold (currently £85,000), it must register for VAT and could consequently lose a sixth of its income to HMRC. In this price sensitive market it might not always be possible to increase prices to cover the costs associated with VAT. If a farm or estate is already registered for VAT, it should automatically charge and account for this additional VAT on its holiday letting income.

Even if the owner isn’t necessarily letting out any of their property as holiday accommodation, but it is advertised or held out as being suitable for such a purpose, it will be treated as holiday accommodation for VAT purposes.

Many residential landlords, worried about the loss of the direct tax benefits associated with residential lettings, have handed their portfolios over to holiday letting agents in return for a guaranteed rent. Although, in most cases, the owner is not operating the holiday rental business itself (as the property is held out for use as holiday accommodation, then let by the owner to the holiday lettings business), it is still liable to standard-rate VAT. Many owners, however, are unaware of this.

VAT on expenses

Being liable to the standard-rate of VAT is not all bad news though, as it means that any VAT incurred on expenses attributable to the holiday accommodation is recoverable to some extent. This includes the cost of refurbishing the property, as well as any other building, construction or ongoing costs.

VAT on conversion works

If a farm or estate converts a non-residential building (or refurbishes a residential property that has been empty for two or more years) for use as holiday accommodation, the work can qualify for the reduced rate of VAT at 5%. This can result in a considerable saving from the 20% VAT normally incurred on building works. If the owner is registered for VAT, this amount could also ultimately be recoverable.

Sale of the property

When it comes to selling your holiday accommodation, if it is a new dwelling with no occupancy restrictions, the first sale or grant will be zero-rated for VAT purposes. If the holiday accommodation has been let out for longer than three years, the sale is normally exempt from VAT. Property owners must remember to consider whether this exempt sale will result in a repayment of VAT to HMRC under the VAT capital goods scheme.

While there are obvious direct tax benefits for moving from residential to holiday lets, there are various VAT implications that should be carefully considered before doing so.

For further information or more specific advice on any of the issues discussed above, please contact Alan Glen or Shana Mohammed on 0131 473 3500.

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