# Difference between tax treatment of rental on holiday homes versus regular lettings



## Bronte (13 Nov 2012)

What is the difference between holiday home rental income and ordinary rental income. 

Does it make a difference if the holiday home is rented only for July/August, Easter, X mas etc. 

Can the mortgage interest be written off for the full year at 75% in that situation.

Also if you use the holiday home on certain occasions during the year how do you account for that. Just apportion the interest by taking out those days.

Is there any other potential things I need to look out for. Such as revenue considering it's an 'uneconomical rental'

What is section 48 relief, is it in any way worthwhile.


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## mandelbrot (13 Nov 2012)

Bronte said:


> What is the difference between holiday home rental income and ordinary rental income.
> 
> Does it make a difference if the holiday home is rented only for July/August, Easter, X mas etc.
> 
> ...


 
That's a fairly tricky question!

When you see it is only rented for certain parts of the year, do you mean that it is only made available for holiday letting during those parts of the year, and is effectively unavailable for letting for the remainder of the year?

Without having looked at any legislation or reference material, I'd be surprised if you were allowed to take a full 12-month interest deduction in those circumstances.

IIRC Section 48 was the relief for holiday homes in qualifying resort areas, or something similar - I would have thought that this relief has washed through the system by now, there's usually a ten-year life for the relief, and I thought S.48 was in effect in the mid to late 90s... It was a very valuable relief, as it allowed a deduction against all income (rather than just rental income), however the units tended to be overpriced as a result, in effect part of what people were buying was the tax relief itself.

Are you sure it's S.48 relief, and not S.23 or S.50 etc...

That's all off the top of my head; someone with more familiarity or the time to check reference material might have something better to offer!


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## Bronte (16 Nov 2012)

Thank you Mandelbrot for your response. By the way that's the second time you've said I had a tricky question. But it cannot be that tricky, there must be loads of people who have holidays homes that they let. 

To answer your question. The property would be available for holiday lets all year, I only put in the seasons because outside of those peak periods I wouldn't imagine one could possible let it. The idea is to put it with a holiday home company. But in about a years time I would use it on occasion. 

The reason I asked about Section 48 was that it was on the advertisement in DAFT. I hadn't heard of S48. S23 is also holiday lets and S50 student accommodation but it was not either of those. I am aware that most of those schemes were of no benefit as they had the tax advantage factored into the price but I guess there is some benefit where you have more than one property and have run out of mortgage interest relief etc. 

I went all over the revenue website but could not find anything specific about the tax treatment of holiday homes. You would think with the amount of people who own a second home that there would be something, maybe I missed it. Maybe very few people are declaring anything. 

Another question. A lot of people bought those section 23's but plenty of them are unlettable, and people are getting zero rent, are they still entitled to write that off against other rental income, or do they come foul of the revenue rule on uneconomic rents? Anyone experienced in the declaration of holiday homes rental income must have an idea of that.


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## Joe_90 (16 Nov 2012)

S48 FA 1995 was indeed the holiday cottage capital allowances.  There may be some that are within the 10 year tax life that are for sale with the allowances still available.

Where you let the property to a management company think that the interest 75% would be allowed.  But you may not be able to stay in the property yourself unless the contract allows it and then an add back of interest would be required.

If you are letting it yourself then time spent there yourself is disallowed and also any period until the next independent letting.  

I have not seen any anti avoidance on the non allowability of either interest or s23 allowances where the property is not let.


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## oldnick (16 Nov 2012)

_"the mere purchase of a sec 23 property does not entitle a person to tax relief. The property must be let under a qualifying lease before relief is claimed..._

_..a property ceases to be a qualifying property if there is a breach of conditions pertain ing to the scheme such as ...(examples) rent-free occupation of the property_ "

These and related comments -spread over many pages of the Revenue guide to sec.23 -doesn't actually answer your question, Bronte, about someone who is trying to rent but failing, or just getting a bare minimum rent, but I'd worry about the part about rent-free occupation.


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## mandelbrot (18 Nov 2012)

Bronte said:


> Thank you Mandelbrot for your response. By the way  that's the second time you've said I had a tricky question. But it  cannot be that tricky, there must be loads of people who have holidays  homes that they let.
> 
> To answer your question. The property would be available for holiday  lets all year, I only put in the seasons because outside of those peak  periods I wouldn't imagine one could possible let it. The idea is to put  it with a holiday home company. But in about a years time I would use  it on occasion.
> 
> ...


Firstly, you could quite easily have missed this on the Revenue website: http://www.revenue.ie/en/tax/it/leaflets/it29.html, unless you knew to search for "Tax Reliefs for Renewal and Improvement of Certain Resort Areas"!

I  said it's a tricky question because it's a very fiddly area  of the legislation, with the relief available depending in the first  instance on whether or not you are trading and chargeable under Case I,  or in receipt of rental income chargeable under Case V. see pages 20-21  here for some light reading to get you started  ([broken link removed]),  where you'll see there's all sorts of fiddly bits depending on whether  particular things happened between particular dates. In your case, having read the tax briefing I'd expect you'd have rental income under Case V.

So you may  be right that lots of people are letting holiday homes; but most of them  aren't ones with the relief on them, and of those that are, there's  probably a strong chance that people aren't necessarily  operating/claiming everything correctly - these things only come out in  the wash when people are audited, and only if the person doing the audit  is _au fait_ enough with the relevant provisions to ensure that the relief is correctly claimed.

In  the case of a registered holiday cottage qualifying for S.48 relief,  the relief was a 50% initial allowance in the first year, and 5% p.a. writing down allowance. The holding period was ten years from first use of the  property. The reason I would be very wary about the relief is that it is  hugely costly to sell a tax relief property, because the vendor incurs a  balancing charge upon disposal, equal to the allowance claimed up to  that point.

The simplest way I can explain is with an example: So  lets say the qualifying expenditure laid out by them at day one was  100k, and that was 9 years ago, they've claimed 95k in allowances to  date. If they sell that property while it's still within its 10-year  holding period, they suffer a clawback of all that relief - effectively  they are treated as having received 95k of rental income at the date  they sold the property. The purchaser of the property (you) then steps  into the original owner's shoes and gets the benefit of the relief. My  point is the original owner would be so much better off to sit tight  until a year or 2 later to sell, after the 10 years have expired and  they won't suffer a clawback.

Hence I advised you get someone who  really knows their stuff in this area to make sure that you're getting  the relief you think you are, and if not that you have some form of  recourse.




Bronte said:


> Another question. A lot of  people bought those section 23's but plenty  of them are unlettable, and people are getting zero rent, are they still  entitled to write that off against other rental income, or do they come  foul of the revenue rule on uneconomic rents? Anyone experienced in the  declaration of holiday homes rental income must have an idea of  that.


There are different provisions governing the various  schemes but regarding the student accomodation: _"in so far as  rented residential relief under section 372AP is concerned, the house  is, in the case of construction, without having been used, first let in  its entirety under a qualifying lease, or, in the case of conversion  expenditure, without having been used subsequent to the incurring of  that expenditure, is first let in its entirety under a qualifying lease,  and in the case of refurbishment expenditure, on the date of completion  of the refurbishment is let in its entirety under a qualifying lease  (or is, without having been used after that date, so first let). This type of letting must continue throughout the remainder of the 10-year relevant period *except for reasonable periods of temporary disuse between the ending of one qualifying lease and the commencement of another*."_

A  good article here, that also illustrates why it was a tricky question!  [broken link removed]

A final point to note in relation to the amount of relief that might be available is that the property may be going for a song, less than the original cost. In this case the amount of relief available will be reduced proportionately. i.e. if the amount of expenditure attracting relief was 100k, and the property (including site cost / cost of work not carried out during the qualifying period) cost 150k, and you buy it now for 75k, then the amount of relief available to you is: 75k x 100/150 = 50k.


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## Bronte (20 Nov 2012)

Joe_90 said:


> If you are letting it yourself then time spent there yourself is disallowed and also any period until the next independent letting.
> 
> .


 

Let's ignore all tax relieves on Section 23 et al as it's getting too complicated. 

Where did you get that info from Joe?  To take the example of a holiday home and it's let on the basis of being available for letting all year but in reality will only be let when someone wanted.  So if I let it for xmas/new year and then wanted to spend a week there myself at the two week break at Easter, it would be better that I use it the first week, let it to someone else the second week and then I'd only lose one week of interest relief etc, is that correct?  Whereas if I used it the second week of Easter, and did not manage to let it again until summer season in June I'd lose the months from Easter to summer in tax deduction.


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## Joe_90 (20 Nov 2012)

That's my view.  Holiday lets would generally yield a higher monthly rate than the average let.  If the property was acquired as a holiday home there is not tax deduction, by letting it out you have taxable income if you only allow 1/52 of the interest then you would paying a disproportionate amount of tax in my view.

Having said that in the initial post you mention renting for July / Aug, x mas and Easter being 12 weeks.  I would think that at the end of a year when you had 12 weeks of letting you could claim the interest.  Now if you take out one of the 12 weeks that you would expect to get a letting for your own use an auditor may argue that a deduction of 11/12 is more appropriate.  Personal use of business property always complicates the issue.  

It's also relative if you are getting €500 per week x 12 that's  one thing if you are only getting €200 per week x 3 and creating a large loss that's you are using to reduce other taxable rents that thats a different matter.

Other views welcome, if this is a real life example then you need specific advice on your own circumstances.


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## Bronte (22 Nov 2012)

As you do I telephoned revenue on this to be assured that it's treated as a normal rental and it doesn't matter whether you stay there or not.  When I queried whether this made sense and surely if you stay there a week or two you couldn't make deductions they were positive it made no difference.  Then when I asked where on their website this was written it was suggested I send an email.  ie person who was proof positive on the rules backtracked when asked for it in writing.  When I find out I'll come back on here.


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## mandelbrot (22 Nov 2012)

Bronte said:


> As you do I telephoned revenue on this to be assured that it's treated as a normal rental and it doesn't matter whether you stay there or not. When I queried whether this made sense and surely if you stay there a week or two you couldn't make deductions they were positive it made no difference. Then when I asked where on their website this was written it was suggested I send an email. ie person who was proof positive on the rules backtracked when asked for it in writing. When I find out I'll come back on here.


 
OK well let's have a look at what the Revenue staff have to go on:

The relevant part of the operating manual (http://www.revenue.ie/en/about/foi/s16/income-tax-capital-gains-tax-corporation-tax/part-04/04-08-06.pdf?download=true) paragraph 3 says:

*Timing of deductions*
Interest can only be deducted during the period in which the property is let.* This means that interest is not deductible for the period following the purchase of the property up to the time a tenant enters into a lease and after the period of the last letting. In the case of the first letting of a property, section 105 requires actual occupationby the lessee before interest can be deducted. *Interest incurred in the period between lettings is deductible provided that the landlord does not occupy the premises during the period and that a new lease is granted*.

_*Referred to in section 97(3) as "during the currency of the lease" or "the period during which the person chargeable was entitled to the rent."_

So, that doesn't appear too favourable - it appears to suggest that if the landlord occupies the premises between lettings that they lose the deduction for interest in the entire period between lettings...


Let's also consider the legislation on which the above manual is based - Section 97(3) states:
"For the purpose of this subsection, the currency of a lease shall be deemed to include a period immediately following its termination, during which the lessor immediately before the termination was not in occupation of the premises or any part of the premises, but was entitled to possession of the premises, if at the end of that period the premises have become subject to another lease granted by the lessor."

So it looks like the manual is correct in a strict interpretation of the legislation - the person who was the lessor/landlord under a letting must NOT be in occupation of the premises or any part of it, between the termination of a lease and the commencement of another.

I would suggest that Revenue probably adopt a pragmatic approach to this - if you have the place available for letting 50 weeks a year and occupy it 2 weeks a year, and add back 1/26 of the interest accordingly, I don't think you'd have a difficulty.

Getting someone in Revenue to confirm to you in writing that they aren't going to strictly apply the legislation is probably not going to get you what you want to hear.


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## Joe_90 (23 Nov 2012)

That's fairly comprehensive.  Good stuff mandelbrot.


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