Property Investors - Tax on Rental Income >> Holiday HomesTags: Landlords, VAT, tax reliefs
Holiday Homes for Personal Use
In these circumstances there is no rental income from the property so it is ignored for income tax purposes. There will be no tax relief on any mortgage interest paid in respect of the property. If the property is sold it will be liable for Capital Gains Tax if a gain is made on it.
Holiday Homes for both Own Use and Rental
In this situation a rental income account for tax purposes will have to be drawn up and all expenses relating to the property e.g. mortgage interest, insurance etc. apportioned between the period of own use and renting to determine what amount of expenses will be allowed as a tax deductible expense against rental income. Any expenses specifically relating to the renting of the property e.g. letting agents fees will qualify in full as a taxdeductible expense against your rental income. Investors may have purchased a holiday home using a limited company. This can give rise to benefit in kind situations based on the availability of the property for the personal use of the investor. Substantial tax liabilities can arise in this type of situation. We can provide advice on such matters by way of consultation subject to a charge for same.
Holiday Homes Tax Reliefs
Section 48 Properties
Over recent years thousands of holiday homes, which qualify for a special tax relief were built in many of our seaside resorts around the country. These became popularly known as Section 48 properties. The cost price of same could be claimed against nonrental income e.g. PAYE earnings. In the first tax year 50% of the qualifying cost price could be claimed against PAYE and other sources of income. Thereafter for ten years an annual claim of 5% of the qualifying cost price may be claimed against PAYE earnings and other sources of income.
Section 23 Type Properties
In some cases the qualifying cost price of the holiday home was allowed as a tax deduction only against rental income from any property in the State. This relief was allowed in much the same way as Section 23 relief.
The holiday homes cannot be let for normal residential lettings. They have to be let to tourists to maintain their special tax relief. This rule applies for ten years from the date of first letting.
Disposal of Holiday Homes After 11 Year Tax Life
Many owners of holiday homes which qualified for the Seaside Resorts Tax Relief may now be considering selling their property as the 11 year tax life will be over very shortly.
The taxes that have to be considered are
1. Income Tax
2. Value Added Tax
3. Capital Gains Tax
We explain the tax treatment for each below.
1. Income Tax
While the general view is that holiday homes may be disposed of without tax penalty after 10 years this is not the Revenue's view for holiday homes which qualified for the Seaside Resorts tax relief.
It is current Revenue policy that this type of holiday home must be used for holiday lettings for a period of 11 years from date of first use.
Example: Property bought and first let March 1999
End of Income Tax clawback period March 2010
Once you have passed the 11 year mark you can make long term lettings of the property instead of tourist lettings if you are not selling the property.
For a property bought and first let in March 1999 the change in the tax year from 5th April to a December year end means that there will be a fraction of the annual 5% claim to be allowed in the tax year ending on 31/12/2009. For most people a quarter of the annual 5% claim will be due in the year 2009.
Many of the purchasers of these holiday homes registered for VAT to reclaim the VAT charged on the purchase and fitout of the property and associated expenses. There were two ways in which this could be done:
You purchase the holiday home and let it to an operator who deals with the letting of the property on your behalf. The lease would normally be for a period of twentyone years with a facility to break the lease after 11 years to coincide with the end of the 11year tax life of the property. The purchaser could then reclaim the VAT costs incurred when buying the property.
For vat purposes this was a sale of the property and a value was put on that sale called the capitalised value of the lease. Generally speaking a procedure called the Section 4 system was used so that the vat on the capitalised value did not have to be physically paid over to the Revenue.
However if the lease is broken before the 21 year term is over VAT will be repayable to the Revenue. The amount of VAT repayable to the Revenue will depend on when the lease is broken. If the lease is broken after 11 years approx 50% of the original VAT on the capitalised value could have to be repaid to the Revenue.
For the owners of the holiday homes who let them by way of long lease this is payable under our self assessment rules. If these rules are ignored interest and penalties could arise at a later stage in addition to the amount of VAT repayable to the Revenue.
We can provide more detailed advice on this matter subject to an extra charge.
Short Term Lettings
For VAT purposes this is the better option. Purchasers of the holiday homes obtained a full VAT refund when buying the property. When the first 10 years are over there is no amount of VAT owed back to the Revenue. This arises because the property was never let by way of long lease to an operator. The owner either let the property directly to tourists or engaged an operator to deal with the lettings on their behalf by way of a property marketing agreement.
Under these arrangements the owner is in the VAT system for 10 years and makes VAT returns in respect of the rents earned and expenses incurred. VAT is payable on the rental income at a rate of 13.5%. When the 10 years are up the VAT registration can be cancelled without penalty. This is done by notifying the Revenue of the position.
There is a conflict here between the 10 years VAT life and the Revenue view that for Income Tax purposes the required period is 11 years. Although you may cancel your VAT registration after 10 years because of the Income Tax rule you must continue letting the property for holiday lets for the 11 year period. If you have more than one holiday home the position is more complicated. You will not be able to exit the VAT system until all your holiday homes are over the 10 year period. We can provide advice on this matter subject to an extra charge.
3. Capital Gains Tax
The normal rules apply and the gain/loss on the sale of the property is calculated in the usual way. Our Capital Gains Tax Calculator will do all of this for you.
Holiday Homes Rental Income Accounts
Just like any other rented property it is necessary to make a return to the Revenue each year of the amount of rents received and expenses incurred. This statement of account is prepared in the same way as any other rented property.
For individuals who reclaimed VAT refunds on the purchase of the property and did not let the property by way of long lease to an operator all rental income figures and expenses will be on a net of VAT basis for income tax purposes.
Expert Tax Library
- Property Investors - Tax on Rental Income (Intro)
- Frequently Asked Questions
- Acquiring an Investment Property
- Taxation of Rental Income
- How to Calculate Your Rental Income
- Property Rental Accounts
- Levy on Investment Properties and Second Homes
- Special Tax Reliefs For Property Investment
- V.A.T. on Residential Property
- Holiday Homes
- U.K. Properties- Tax Treatment
- Foreign Property Rental Income Losses
- Irish Property Investors Resident Abroad
- Property Finance
- Stamp Duty