Furnished Holiday Lettings – A Tax Guide

Where a furnished rental property is designated as a ‘furnished holiday letting’ (FHL) there are several advantages over a normal let property as it is basically treated as a trade for certain tax purposes. This includes tax relief to be claimed on expenditure on fixtures and fittings and also provides entitlement to various capital gains reliefs when the property is subsequently sold, replaced or gifted.

Owners of FHLs should endeavour as far as possible to comply with the specified letting rules outlined below, thus ensuring that the property qualifies for the favourable tax advantages.

Qualifying letting periods

  • The FHL property must be available for commercial holiday letting to the public for at least 210 days per year AND be actually let as holiday accommodation for 105 days per year.
  • It must not normally be let for a continuous period of more than 31 days to the same tenant in seven months of the year.

There are two ways to help owners of FHLs to reach the above thresholds. If an owner owns more than one FHL the ‘averaging’ election might be helpful and if a FHL meets the thresholds in some years but not in others, then a ‘period of grace’ election is currently available.

Location of property

  • All FHL properties which are located in the UK are treated as one ‘business’ and all properties located in other EEA states are taxed as a separate ‘business’.

Capital allowances

  • Expenditure on fittings, furniture and equipment (and certain integral features) qualifies for a 100% annual investment allowance (AIA) up to £250,000 pa for expenditure incurred between 1 January 2013 and 31 December 2014.
  • The availability of the AIA means that expenditure on such assets installed in a qualifying FHL property can be wholly written-off for tax purposes in the tax year in which the expenditure is incurred.
  • Note however that there are no capital allowances available on the cost of the property itself or the land on which it stands.

Pre-Letting Expenditure

  • Revenue expenditure incurred in the pre-letting period, such as advertising costs or repairs can be deducted against rental income received during the first tax year.
  • Expenditure incurred in renovating a property so that it is brought into a condition fit for letting are treated as capital costs.

Personal Use

  • Where the property is used by the owner (or their family at a nominal rent) then any qualifying expenditure must be restricted by the private use proportion on a just and reasonable basis.

Treatment of FHL losses

  • Where a net loss, after deduction of any capital allowances, is incurred on UK located FHLs it can only be offset against UK FHL profits of a later tax year.
  • Likewise where a net loss is incurred on FHLs located elsewhere in the EEA then it can only be carried forward against future profits of the same properties.
  • ‘Sideways’ loss relief, which prior to 2011 allowed losses on FHLs to be set against other types of taxable income, is unfortunately no longer available.

Capital gains tax advantages of FHL

Qualifying FHL properties continue to be treated favourably for CGT. FHLs are classified as ‘business’ assets and are therefore eligible for the following CGT business reliefs:

  • Entrepreneurs’ Relief ~ resulting in a CGT reduced rate of 10% payable on any capital gains arising on the disposal of the property (up to a lifetime limit of £10 million)
  • Gift Relief ~ which means that where a property is gifted the capital gain arising can be frozen and will only become liable to CGT on a subsequent disposal by the recipient.
  • Replacement of Business Asset Relief ~ which allows a capital gain arising on the disposal of a FHL to be deferred by setting it against the cost of a replacement business asset acquired within three years of the disposal.

Inheritance tax position of FHL

  • Following a Tribunal decision made in favour of HMRC in January 2013, 100% Business Property Relief is only likely to be available on furnished holiday lettings where the services provided are at a substantially more significant level than those provided on a standard let property.
  • Therefore in the vast majority of cases a FHL left on death will be treated as investment property (rather than business property) and as such fully chargeable to Inheritance Tax as part of the deceased’s estate.
  • For lifetime transfers, a FHL property will only become chargeable to IHT should the donor die within seven years of the date the property was gifted.

Value added tax position of FHL

  • The rental income from a FHL is regarded as taxable turnover for VAT which means that if an owner is already registered for VAT then they must also charge 20% VAT on the FHL rentals payable by tenants.
  • Where the rents from a FHL taken together with turnover from an unregistered business exceed £79,000 in a 12 month period, then that person should register for VAT.
  • Where however a FHL is jointly owned with a spouse then the rental income is received in a different capacity so VAT should not be an issue.

Tax Reduction and Cost Segregation – Myths and Facts

Tax tips and tax help to assist taxpayers by describing options for tax reduction and tax cuts through lawful tax deductions.

Tax reduction and tax deferral are both generated by cost segregation. However, this tool is not well understood by most real estate investors and by many tax preparers. The root cause of limited understanding regarding cost segregation and how it provides tax reduction is limited dissemination of factual data on the subject.

The most prevalent myths include:

  • Cost segregation does not provide tax reduction, only tax deferral.
  • Cost segregation is too expensive. It only works for properties with a cost basis of $10 to $20 million or more.
  • Cost segregation is risky; it is a tax shelter likely to cause an audit.

All three myths are simply incorrect.

Cost segregation provides tax reduction by converting income which would have been taxed at the ordinary income rate (35% maximum) to income taxed at the capital gains rate (15% maximum). During the ownership period, cost segregation generates additional depreciation real estate investors can use to shelter income from the property or other sources. In many cases this income would have been taxed at 35%.

Upon sale, the property owner and tax preparer will collectively allocate the sales price. In most cases, short-life property such as carpet, vinyl tile and paving have depreciated and the market value of these assets (at the time of sale) equals their depreciated cost basis. In this event, the additional depreciation is taxed at the capital gains rate. Hence, the real estate investor gains both tax reduction and tax deferral.

Cost segregation used to cost $20,000 to $50,000 per property and was only financially feasible for properties with a cost basis of at least $10 million. However, fees for cost segregation studies are now much lower. It generally makes sense to order a cost segregation study if the cost basis of improvements is at least $500,000. In most cases, the first year tax reduction is at least two to four times the fee for the study.

The myth about cost segregation studies being a risky scheme is completely inaccurate. A properly prepared cost segregation study is encouraged by the IRS since it generates more accurate accounting. The Audit Techniques Guide is a 100-plus-page manual regarding the background and proper methodology for a cost segregation report.

Both the advisors and appraisers (who perform cost segregation studies) have studied and understand the Audit Techniques Guide. Cost segregation studies are encouraged by the IRS. In private correspondence, IRS staff has indicated a cost segregation study does not increase the change of an audit.

If you are a real estate investor or use real estate in your business, ignore the myths and obtain a free preliminary analysis to determine if you could benefit from a cost segregation study and increase your tax reductions and tax deductions.

Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

City:

  • Philadelphia, PA
  • Boston, MA
  • Denver, CO
  • Memphis, TN
  • San Francisco, CA
  • Tampa, FL
  • Hartford, CT
  • Atlanta, GA
  • Miami, FL
  • Orlando, FL
  • Allentown, PA
  • Harrisburg, PA
  • Lancaster, PA
  • Greenville, SC
  • McAllen, TX
  • Tulsa, OK
  • Charleston, SC
  • Chattanooga, TN
  • Palm Bay, FL
  • Oxnard, CA
  • Madison, WI
  • St. Louis, MO
  • Columbia, SC
  • Lakeland, FL
  • Youngstown, OH
  • Knoxville, TN
  • Detroit, MI
  • Columbus, OH
  • Des Moines, IA
  • Cincinnati, OH

Cost segregation produces tax deductions for virtually all property types.

Property Type:

  • Fast food restaurant
  • Department store
  • Auto dealer
  • Convenience store
  • Service center warehouse
  • Self-storage
  • Drugstore
  • Land
  • Multifamily
  • Medical facility

Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.

Industry:

  • Automotive parts distributors
  • Frozen food manufacturing
  • Apparel manufacturing
  • Electrical component manufacturing
  • Plastic and rubber products manufacturing
  • Publishers
  • Textile product mills
  • Building supply dealers
  • Wood product manufacturing
  • Golf courses and country clubs

Buying Spanish Property – A Purchaser’s Guide

Are you in the wonderful position of being able to afford to buy a holiday home abroad? Or are you simply thinking of moving to a country with a more temperate climate and a more relaxed way of life? Whichever is the case, Spain could be the country of your choice, and if this proves to be the destination of your dreams you will need a little help and guidance along the way. Below I have outlined a few hints and tips that will make the buying process a little easier and hopefully, less stressful. If you follow these guidelines purchasing a property in Spain should be an exciting and pleasurable experience – avoiding some of the more common pitfalls is all that it takes.

1. Set Your Budget – I think that this is the most important decision that you will make. Look at your finances and decide exactly what spare cash you have available to you. Be honest with yourself and be realistic, emergencies happen and in the future you may need to raise finance for something more important – don’t stretch yourself. Having set your budget stick to it and be very wary of viewing any property that is above your budget – chances are you will fall in love with something you cannot afford and it will be extremely difficult to put that property out of your mind and settle for something more realistic.

2. Choosing the Area – Location, location, location. It is an old cliché but an important one. You may already know the area where you would like to settle, but otherwise visit a few different locations to make yourself aware of the various possibilities. In choosing the location you may also have to consider point one – your budget.

3. Type of Property – A couple of options to start with – new or resale? Many estate agents will try to point you in the direction of new property, mostly because this is the area where they get the least hassle and the most commission. Fine, if you want to purchase a new property, then go ahead, there are many advantages to taking this route but also be aware that there is a huge choice of resale property available in Spain and there are plenty of bargains to be found. Most resale properties are sold fully-furnished and equipped – this can save you a lot of hassle and a lot of money. Most new property is sold off-plan, so you may have to wait up to 2 years before you get your keys. Knowing what is going to be built around you is also important – it can be hard to visualize when you are staring at an empty field! Also that large apartment block may be blocking the sea view of your new villa, be careful!
The next consideration is the property type – house, villa, apartment, bungalow, the choice is endless. This will mostly be determined by personal choice and, of course, once again – budget. You may also at this stage wish to consider if you want to be on an urbanization or have some solitude in the countryside. There are advantages to both, urbanizations can be noisy during the summer months but they are generally safe and child friendly. The countryside can be peaceful but how far is it to the nearest shop? What about when the family visit – is it the type of holiday they would be looking for? Also, you may want some kind of social life, there are lots of things to consider before making your final choice.

4. Choosing Your Property – Now is the exciting time, going out and viewing possible properties. Take your time and look at as many as you can – if you are looking at new properties, don’t be rushed into a decision “this is the last one available” is the selling point of many an estate agent. Don’t be fooled, there are always plenty of properties available. Take lots of photographs and if possible a video, this is very useful when reviewing later, it can get very confusing when you are looking at lots of properties. Make a short list and go back to look again. This is an important decision – take your time.

5. Paying a Deposit – You have made you choice, now is the time to put your money where your mouth is! The usual in Spain is a 3,000 euros deposit to take the property off the market. The next step will vary depending on whether your choice is new or resale. With new property the next step will probably be payment of something in the region of 30% of the final purchasing price, payable within one month. There may also be stage payments during construction though the norm is balance on completion. Different builders have different rules so be aware of these before you decide to put down your 3,000 euros deposit. With resale property the whole process can be completed within 1 month (if this suits both seller and buyer), so normally it is 3,000 euros deposit and the balance on signing at the notary.

6. Appointing a Solicitor – It is important to appoint a Spanish solicitor who is well versed in Spanish property law and with a good grasp of the English language. He (or she) will be your friend and ally throughout the buying process and will make sure that there are no outstanding debts on the property. Also after the signing he will help with such things as changing electricity and water contracts into your name. You can usually also retain him to deal with your future tax returns in Spain.

7. Taxes and Costs – You will need to be aware of the various taxes and costs that will need to be paid both during and after the purchase.
Taxes on purchase , transfer tax (IVA), 6% of the purchase price on new property, 7% on resale. plusvalia tax, calculated on the appreciative value of the land the property is on (normally paid by the purchaser). Land registry charges – around 300 euros to change the property into your name. Notary charges, can vary depending on location but generally around 500 euros.
The guideline for extra taxes and costs is 10% of the purchase price although this can be nearer to 12% if you are obtaining a mortgage to purchase the property.
Taxes after purchase – SUMA, local council tax payable every year. Community fees, if you are on an urbanization there will be fees for the upkeep of common areas such as gardens, swimming pools, lifts etc. This may be payable monthly, quarterly or half-yearly.

8. Signing the Deeds – The property deed is known as the Escritura in Spain and the signing of this and the final payment for the property is done at the notary office (the notary is an official government representative). You may be present along with your solicitor for the signing or your solicitor can do this in your absence if you have previously given him power of attorney (a common practice in Spain). Before you can sign the deeds you will need to obtain an N.I.E number (foreigners identification number), this can be obtained at any national police station but make sure you ask your solicitor about this long before the signing and he will advise you how to obtain one. Also make sure that you have your original passport with you before going to the notary, also the passport of anyone who is to appear on the deeds.

9. Taking Possession of the Property – When the deeds are signed and the final monies paid you will receive the keys to your property. You will then need to make sure that electricity, water and SUMA contracts are changed over into your name. Don’t forget to organize property and contents insurance. If the property is new, you will want to check it through and write a snag list of any problems.

10. Congratulations – You are now the proud owner of a property in Spain, may the sun shine on you and the value of your property rise, that tiny one bedroom apartment may one day turn into a seafront villa! – Relax and enjoy.