Holiday lets with personal use

This factsheet is a guide for UK residents looking to buy UK residential property to use as a personal holiday home and let to other holidaymakers.

Introduction

Buying a holiday let is an exciting prospect, but the way you structure your ownership can make a significant difference to how much tax you pay, both now and in the future. The two main options are buying the property in your own name (personally) or through a limited company (company).

Buying personally

The main advantage of personal ownership is simplicity. There is no company to set up or administer, mortgage finance is generally more accessible and offered at better rates, and there are no additional filing obligations beyond your personal self-assessment tax return. There is scope to claim the £1,000 property allowance for income tax. On a sale, you may be able to use your £3,000 capital gains tax (CGT) annual exemption to shelter some of the gain.

However, the drawbacks are significant for higher earners. Rental profits are taxed at your marginal income tax rate, up to 45% for additional rate taxpayers and any mortgage interest costs are restricted to a maximum of 20% tax relief. Property income tax rates are also due to increase from April 2027 for basic and higher rate taxpayers.

Private use adjustments will need to be made to restrict your deductible expenses so that they relate to times of commercial letting only.

On disposal of the property, CGT will be assessed on any capital growth at 18% or 24%. This must be reported and paid within 60 days of your completion date.

Buying Through a Company

For higher and additional rate taxpayers who do not need to draw the rental income immediately, a limited company can offer real tax advantages. Rental profits within a company are taxed at the corporation tax rate, currently between 19% and 25%. This is considerably lower than the higher rates of income tax.

Companies can deduct mortgage interest in full as a business expense, with no restriction.

Profits retained in the company can be reinvested or used to acquire further properties, compounding growth with less tax drag along the way. There can also be flexibility with ownership shares.

That said, a company structure brings its own complications and costs. Setting up and running a company involves annual accounts, Companies House filings, and corporation tax returns, all of which typically require professional help.

Mortgage finance for companies tends to be more expensive and harder to arrange, and lenders will often require a personal guarantee.

Perhaps most importantly, if you need to take money out of the company, whether as salary or dividends, that triggers a further layer of personal tax.

And because you personally want to use the property as a holiday home, this creates a particular complication: use of a company-owned property by a director or shareholder can give rise to:

·A benefit-in-kind charge unless full market rent is paid by you to the company. This would lead to additional taxes for both you and the company each year.

·“Annual Tax on Enveloped Dwellings” (ATED) annual charges, if the property is worth more than £500,000.

·Higher than usual Stamp Duty Land Tax (SDLT) charges if the property is purchased for more than £500,000.

On an eventual sale, the company pays corporation tax on any gain, and extracting the proceeds into your hands then triggers additional personal tax. The overall tax cost on exit can be higher than it first appears.

Key Considerations Before You Decide

The right structure depends heavily on your personal tax position, whether you need the rental income now, and your long-term plans for the property. A few points are worth highlighting regardless of which route you choose:

·SDLT applies to residential property in England and Northern Ireland. Land and Building Transaction Tax (LBTT) applies in Scotland. Land Transaction Tax (LTT) applies in Wales. Each regime is slightly different, but all charge a premium for ‘additional properties’.

·If you already own the property personally and are thinking of transferring it into a company, be aware that this is treated as a disposal at market value, potentially triggering CGT and SDLT at that point.