Alan. W. Simons & Co

Who hasn’t lazed on the terrace at sunset, sipping a glass of something cool and wondered how much enjoyable life would be if they owned their own little piece of paradise?

The thought of a holiday home – and the potential for extra income from letting it out – is a tempting one.

With the holiday season upon us, the Institute of Chartered Accountants in England and Wales (ICAEW) has highlighted what you need to consider before trying to buy a place in the sun, with a lot depending on which home you declare to be your primary residence and whether or not you choose to let the property in question.

Anita Monteith, Manager at the ICAEW Tax Faculty, said:

“Each of us can only claim exemption from Capital Gains Tax (CGT) on one home, as our ‘main residence’, at any given time. Furthermore, a married couple or registered civil partnership can only have one main residence between them. A second home may therefore lead to a future Capital Gains Tax liability when you come to sell it.

Where a second property is used privately, a ‘Main Residence Election’ can be used to reduce the CGT burden significantly. It is vital to note, however, that there is a two year time limit for this election. Many people fail to elect in time, leaving HM Revenue & Customs to decide which property should be treated as the main residence.

The private residence exemption applies to private residences both in the UK and overseas. The exemption applies to the taxpayer’s main residence, not as some people have thought - often to their cost - their main UK residence.

When the second home is let out, any profits arising from the letting will be subject to Income Tax in broadly the same way as a ‘buy-to-let’ property or more traditional rental. This may also jeopardise your chances of claiming any main residence relief for CGT purposes or, at the very least, reduce the amount of relief available.”

Furthermore, when buying a holiday home abroad, foreign tax implications will also need to be taken into account.

Ms Monteith, continued: “Buying a holiday home abroad adds another dimension of complexity to the tax situation. For most of us who are UK nationals, the UK tax issues don’t go away and the same potential CGT and Income Tax exposure as for a second home in the UK will again arise.

The extra problems come from the potential taxes in the foreign country where the property is situated. Foreign capital taxes and income taxes will usually apply and, on top of these, there is often the danger of significant levels of foreign inheritance tax.

In this year’s Budget, the Chancellor announced that there will be no tax charge on individuals who use an overseas property purchased through a company of which they are a director or employee. Many people buying abroad do so through a company for reasons unconnected with tax, such as to secure inheritance rights.

Even so-called ‘tax havens’ will often have backdoor methods of taxing foreign investors with the added drawback that our own Government will not allow any relief for any foreign tax which is not recognisably similar to our own UK taxes.”

So, home or away, if you’re looking to profit from your holiday property, remember, you may be taking a break from the daily grind, but you’re not taking a break from your tax liabilities.