Holiday letting in the UK offers investors a more beneficial tax environment than holiday homes abroad, something that many property investors are unaware of, claim business and financial advisers, Grant Thornton.

Often regarded as the less attractive side of holiday property investment, such properties in the UK benefit from a wealth of tax reliefs, steer clear of currency fluctuations and avoid the complexities of dealing in a foreign language and an unfamiliar legal jurisdiction.

Sheena Ian LuderHay, tax partner at Grant Thornton commented: "As the residential property market starts to stabilise and pensions continue to fail to match expectations, more and more people are investing in holiday homes as part of their retirement planning. However, buyers should be aware that there may be significant tax advantages to purchasing in the UK."

"By contrast, if you buy a property abroad, even if you are resident in the UK, you may have to pay tax in the country in which the property is located and UK tax on the foreign income, claiming double taxation relief. Depending on the country that you choose, you may have a hefty tax bill to pay if the tax rates exceed the rates in the UK."

The difficulty of buying a property located in a country where English isn't the first language shouldn't be underestimated. All legal documents will need to be officially translated and where the purchaser can’t be present, Power of Attorney to a legal representative on the ground will need to be granted. "It's not surprising therefore that administrative and legal fees can rapidly mount up," added Luder.

"The south coast of England gets around 1,750 hours of sunshine each year which isn't much less than areas such as Brittany and Normandy - traditionally areas where the British buy holiday homes. As such, even the weather can't be used as an excuse for not buying in the UK," commented Luder.

Benefits of purchasing a holiday property here in the UK:

1. Tax reliefs only available to furnished holiday lets in the UK

Income from the letting of property is normally treated as investment income for tax purposes. By contrast, rental income and expenditure in relation to furnished holiday lettings is treated as a trade for most tax purposes, with beneficial results.

a) Chargeable profits
Expenses, such as those listed below can be deducted against your income in calculating your tax bill, if they are wholly and exclusively used for the purposes of the letting business:

• rents, rates, insurance and utilities
• repairs and renewals, gardening and cleaning
• legal and professional costs
• capital allowances

b) Capital Gains Tax (CGT)
There are numerous CGT reliefs available to furnished holiday lettings, for example:

• By qualifying as a business asset, the property is eligible for more favourable rates of taper relief on a disposal by an individual or partnership
• Following two years of ownership, the effective rate of CGT may be as low as 10% on a disposal. By contrast, non-business assets have to be held for 10 years or more in order to obtain the maximum rate of non-business asset taper relief, which is currently 60%. This gives an effective rate of capital gains tax of 24% for higher-rate tax payers
• You may be able to roll over your gain on other business assets by investing in a furnished holiday let, obtaining a tax deferral
• Should you want to give your furnished holiday let to another family member, no capital gain will be triggered if you qualify and elect to apply holdover relief. The recipient will suffer the gain instead if they dispose of the property in the future.

c) Costs of improvement
Furnished holiday lettings are deemed a 'qualifying trade' for income tax purposes and capital allowances can be claimed on acquisitions of plant and machinery e.g. furniture and kitchen equipment.

Luder added, "It should be remembered that the benefits of claiming capital allowances need to be weighed against the fact that claiming them will reduce income which may be important for relevant earnings purposes in making any pension contributions. In such cases, the individual will need to consider whether claiming capital allowances is beneficial."

d) IHT considerations
In some circumstances, furnished holiday lettings will qualify for business property relief ensuring no inheritance tax (IHT) arises. "However, this very much depends on whether the property actually constitutes a 'business'", commented Luder.

2. Lack of currency risk

"Purchasing a property abroad has been made all the more attractive in recent years by the strong pound," said Luder. "However currency fluctuations can work against the purchaser if they are paying their mortgage in a different currency to their income. With countries in Eastern Europe, such as Croatia and Slovenia experiencing a boom in purchasers from abroad, as well as more exotic locations, such as Bali in Indonesia, it really is a case of 'buyer beware'."

"The property boom may appear to be over here in the UK, but the truth of the matter is that no-one really knows what will happen to property prices or the currencies of some of the more fledgling economies where properties are now being sought,"

3. Avoiding having to deal in a foreign language and unfamiliar legal jurisdiction

Legal and administrative costs tend to be high when purchasing a property abroad, because of the need to translate official documents, for example. In addition, very often when purchasing a holiday property abroad, individuals are advised to make the purchase through a company. This can often give rise to tax problems back in the UK and benefit-in-kind charges.

Choosing which country to buy in can also be fraught with problems. "The popularity of countries and resorts goes through phases and buying in a property 'hot spot' one year may backfire a couple of years down the line when holiday makers move on to another country," concluded Luder.

For a holiday home to qualify as a furnished holiday letting it must fulfil the following criteria:

• Be situated in the UK
• Be available for commercial letting as holiday accommodation for periods which total at least 140 days per year
• Be actually let for at least 70 days per year
• Where more than one qualifying furnished holiday let is held, it is possible to average the number of days all properties are let in total in order to meet this condition, provided the other two conditions are met in relation to each property separately. For a period of at least seven months, it must not be occupied by the same tenant for any continuous period exceeding 31 days