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How does my holiday home in the UK affect my capital tax position?

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By Laura Walkley

For many people, owning a holiday home is a major aspiration. Having a place to enjoy at leisure certainly has its appeal, and demand for UK holiday homes has significantly increased over the last 18 months, in light of the COVID-19 pandemic. However, owning one may have Inheritance Tax (IHT) and Capital Gains Tax (CGT) implications which should be considered.

The basic position is that a holiday home is an asset of the owner’s estate. If they own it when they die, the open market value of the property (or their share of it) will be included in their estate for IHT.  If the estate passes to anyone other than the owner’s husband, wife or civil partner, or registered charities, then the value of the net assets in excess of the relevant allowances will be subject to IHT at 40%. 

If a holiday home owner wants to give away the property in their lifetime, perhaps with a hope that it will then be outside their taxable estate on death, there are some capital tax traps to be aware of: 

  • The former owner of the holiday home will need to live for at least seven years from the date of the gift, before the value of it falls out of their estate for IHT.

  • If they want to give away the property but still stay there on occasion, they will fall foul of the ‘reservation of benefit’ rules, unless they pay the new owner(s) a market rent for the time they spend there. The recipients of that rent may need to pay income tax on those payments. 

  • If the value of the holiday home at the date of the gift is higher than the value when the giver acquired it, there may be CGT payable on the gift. This applies even if the owner is giving the property away, and not selling it, to the recipients, which can cause tax flow problems. CGT on UK property disposals must be paid within thirty days.

Taking professional advice can help you to understand your position and to mitigate these potential tax pitfalls. For example, it can be possible to defer the CGT charge on a gift of a holiday home by passing it into specific forms of trust. Trusts can have IHT benefits for the beneficiaries, which mean they can be a useful estate planning tool.

There are also circumstances where a holiday property can be classed as a business asset, and benefit from IHT business property relief (BPR). This is a significant relief which can greatly reduce the IHT liability of a deceased owner’s estate. However, the eligibility requirements for the relief are stringent and a careful approach needs to be taken if it is being sought.

Owning a holiday home abroad has far more complex tax implications for people who are UK income tax resident and specialist advice should be sought, both in terms of taxation in the UK and overseas, and Wills if you have a holiday home (or any other assets) overseas

If you own or are planning to buy a holiday home, and would like to discuss the potential tax consequences for your estate, please get in touch with one of our Private Client experts, who will be happy to assist.

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