Best way to buy holiday house

[TallMark]

My wife and I are looking to buy a place on the coast, mostly to rent out for short term holiday rentals and occasional use ourselves.

The places on our short list we could stretch to buy cash (or small extension on current residential mortgage), so could avoid the specialist holiday-rental mortgages, but that is a backup option as well.

I'm a higher rate taxpayer, my wife doesn't work at the moment, so our first thought was she would buy it in her name and run it herself therefore making best use of her income tax allowance.

But would we be better off setting up and purchasing through a company? Any other considerations?

We're not doing this to build a property empire or seeking maximum yield, the truth is we haven't done much in terms of running the figures. We both just feel that putting the cash in property will stop us spending it more wastefully (me on cars, her on holidays). As much as anything she wants a base for weekends at the beach with the kids. Nevertheless there are better and worse ways to run it, hence asking you smart folks on here.

Any other advice welcome!

[MadProfessor]

I should preface this by suggesting that you speak to, and pay, a qualified professional to get the best advice. But in my very humble opinion.....

Whether you purchase it as an individual(s) or as a company you will still benefit from Furnished Holiday Letting tax rules and will have to pay the additional stamp duty rate.

So that would make no impact on your decision.

The income situation is more difficult but I would think that owning it in your wife's name as an individual as a non-earner. Company tax advantages only really kick in for higher tax rate earners under the new tax rules (unless I've completely misunderstood them).

As an individual your wife would pay no tax upto the allowance of £11.5K then 20% on the rest to £45K. Through a company she would have to pay corporation tax (20%) first before providing dividends. She'd get £16.5K without further tax until the dividend allowance drops to £2K then she'd get £13.5K without further tax. After this she's paying 7.5% on top of corporation tax until the higher rate is triggered. In addition, setting up and running a company involves some overheads both financially and in terms of on-going paperwork.

In terms of purchasing it this depends on how you plan to finance the mortgage. My undersanding is that if you purchase the property without a mortgage (even if extending your own residential mortgage) that you would get no mortgage tax relief, whereas if you had a mortgage you would get 20 percent relief as an individual. This is where it becomes tricky - can companies still claim full mortgage tax relief? I'm neither an accountant nor a lawyer but my reading of this is that there is a debate. It's difficult to impose the new changes on corporate entities but then HMRC has a legitimate argument that an individual setting up a company solely to get mortgage tax relief is tax avoidance.

So you first need to ascertain whether you can get full mortgage tax relief if you buy the property as a corporate entity and then whether that makes it more sensible given that (i) your costs of borrowing are higher than if you extend your residential mortgage, and (ii) how income is handled as per my previous paragraph.

N.B. Remember to qualify for FHL the property needs to be available for 210 days a year and be let for 105 days a year (among other requirements).

[mac96]

Another thing to think about(if you have not chosen a location yet) is that council tax rules for furnished but not permanently occupied premises vary between councils.

For example, Gwynedd will soon charge a 50% premium, unless property is rented out 10 weeks in previous year- how that works in first year I do not know. Other authorities may approach it differently. I think the premium (in Wales at least) can in theory be up to 100%.

Alternatively I think you might be able to pay business rates instead- again, that might be a good or bad thing depending on where and the levels of rates and council tax.

[TallMark]

Thank you both, very useful responses.

A quick bit of research implies that a holiday let would pay business rates instead of council tax, with various reliefs applied depending on council as you say, but I haven't read through all the small print yet. I was surprised at how much of the year it needs to be occupied though and that may have a bearing on which property we offer on (that one we prefer wouldn't rent as easily as our second choice).

[GT03ROB]

If you can qualify under the holiday let tax rules (105 days rented per year, which i not too difficult to achieve), it can be quite advantageous. Pick the right property & it can be a good model. Do your research, but bear in mind that when you will want to use it is when business is best! We've just started one, started advertising beginning of June & are now fully booked until mid-September.