Holiday Let Purchase – Best Through A Company Or Not?

Holiday Let Purchase – Best Through A Company Or Not?

11:48 AM, 16th September 2021, About a month ago 4

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Like so many other Landlords, we’re at a crossroads at present, and about to diversify into the Holiday Let business. It’s something we’ve explored before, especially as two of our BTL properties are cottages in a tourist area, which cottages.com and others have been keen to put on their books, but we decided (luckily when the Covid lockdown is considered) against this, as they are 120 miles from home.

Then a cottage came up for sale in our home town, again in a tourist area, and we’ve decided to buy it for holiday lets, and the purchase is slowly going ahead. As holiday let mortgage interest rates are typically around 3% to 4%, as opposed to BTL re-mortgage rates of around 1.75%, we have decided to buy the cottage outright, by remortgaging 2 of the unencumbered (no mortgage) BTL properties we own, and have mortgage offers in place.

On one of the Holiday Let websites, it states that if finances are raised against your own residential property for purchase, then interest costs are not permitted against rental income but doesn’t mention those in our situation, so I assume what we’re doing is OK. Does anyone have experience of this?

Then comes the question of taxes! If the new property is registered in our own names, then any income would be subject to personal taxation, and already having 4 BTLs, plus other incomes, then we’re no doubt looking at 40% tax rates on profits. We still have a Ltd company, of which my partner and I are Directors & shareholders, which although not dormant, isn’t doing anything at the moment, so would using this be an opportunity not to be missed?

Could the holiday let be purchased in the Company name, obviously using our personal finances (re-mortgages) for doing so, probably as a Director’s loan?

We’re not particularly worried about Inheritance Tax, as we don’t have children. Does anybody else have a similar experience?

Martin



Comments

by silversurfer2017

10:30 AM, 17th September 2021, About a month ago

You mention being lucky that you were not in holiday lets when the Covid lockdown started but having a holiday cottage let out at least partially throughout the lockdown I am in a position to disagree with that comment. Ours is a 2 bedroom holiday cottage with its own separate front and back entrance and its own parking space. Because it was entirely self-contained with its own separate entrance (not shared entrance) we have been able to let it more or less through most of the lockdown period. Because we are registered for business rates (although we get 100% exemption as a small business) we were able to claim all the hospitality grants which amounted in total to around £28,000 in addition to the reduced income we received from our holiday let. So our holiday let income has been at least double what it would have been even if we had been fully let for the whole period with no voids.

by silversurfer2017

14:18 PM, 17th September 2021, About a month ago

Regarding taking out a loan on your own property to finance a new holiday let then all of the loan interest will be tax deductible provided that all of the loan will be used to fund a holiday let purchase providing that holiday let will be used as a business and it qualifies as such. For example must be available for at least 210 days in any tax year and be let for at least 105 days at market rates rental (not half price to all your friends and family)
Very similar situation I was in a few years ago - was buying a new 2 bedroom flat off plan and it was a bit tricky to get a BTL loan for a property with an uncertain completion date and and an uncertain rental return, although I was confident of at least a 5% gross return. The loan was tax deductible because all of the funds were going to be use to buy a new BTL.

by Property Peeps

9:24 AM, 22nd September 2021, About a month ago

Hi Martin, have been down the same road, lots to consider, suggest running some long term spreadsheets. Consider your exit strategy. At some point you will probably want to sell. Holiday lets for us have a great yield but as with HMO/student properties vs standard BTL they are a lot of work. and we don't see us holding on to them forever. Have you looked into the wonderful world of capital allowances for holiday lets and also the possibility of Business Asset Disposal relief when you sell? If you don't need all of the income from the FHL then contributing to your pension via the ltd co. is super tax-efficient. I'm sure others will have different opinions but if I were in your position and didn't need all of the profit from the FHL. I would buy in the ltd co. claim the capital allowances (in the region of 20-30%) of the value of the property, contribute heavily towards your pension take the 2k tax-free dividend per shareholder plus all the ltd company benefits... odd meal, vouchers, run a commercial vehicle, etc. Anything leftover build up a pot in the Ltd company so that when you are not earning other income you can pay yourself the tax-efficient way from the ltd co. Good luck with it.

by Alex Norian

10:53 AM, 23rd September 2021, About a month ago

Hi Martin,

The answer to your first question is that the interest is allowable provided the purpose of the finance is "wholly and exclusively" for the purpose of buying the FHL (s34 ITTOIA 2005). I would recommend you seek further advice if this process would result in the total finance on the 2 BTL cottages being in excess of the original purchase prices.

Yes, the holiday let could be purchased in your own name using your personal finances. Not using the company would likely be a missed opportunity, although there is no substitute for a bespoke consultation to understand all of the facts. If you have other income and don't need the FHL income to maintain your lifestyle, then perhaps the intention is to ringfence profits in a tax-efficient manner to continue to grow the portfolio? In this case, a company would be a tax-efficient vehicle to achieve this.

Who do you intend to inherit your portfolio when you pass? Do you have siblings / nephews / nieces etc?

Taking it a step further with a Smart Company structure would offer greater benefits still. See > https://www.property118.com/the-ultimate-guide-to-landlord-tax-planning/ and download the eBook if you've not yet.

Once you've digested the eBook, I would recommend booking onto a consultation so a tax expert can understand the full context before advising accordingly.

Alex N


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