How tax changes will affect your second home

Until recently, owning a holiday home and renting it out was a smart investment. Any losses could be offset against the tax on other earnings, and capital gains tax and inheritance tax could be deferred or avoided under the rules that govern business assets.

All this made it a win-win for higher-rate tax-payers: if your holiday home was netting you extra income, then great.


But if it wasn’t, the loss came largely out of your tax bill instead of your pocket. And when you died, it could be passed down without incurring any inheritance tax.

But a court case this month ruled that a furnished holiday home isn’t a business at all – it’s an investment. This means the inheritance tax relief for business assets largely don’t apply to holiday homes, unless they’re defined by HMRC as a ‘guesthouse’ or a B&B. And the difference between a holiday home and guesthouse depends on the level of involvement of the owner. Technically, the owner of a guesthouse is supposed to be a resident in the property, and therefore involved in the day-to-day running of the place.

So the answer, if you’re worried about the tax changes hitting your second home, is to move in. But that’s rarely possible, of course. So top tax lawyers have been looking for wriggle room, and reckon it could be possible to define your second home as a guesthouse without living there. But you would still have to be involved in day-to-day tasks that come with running a guesthouse like cleaning and managing the change-over between lets. In short, you need to actually be there quite a bit, not just farm everything out to an agent or maintenance company.

Under the new regime if you want in on the financial privileges afforded to businesses, you’d better roll your sleeves up or be prepared to take the hit.