[HesterF]

Hi,

Not sure where to post this so I've plumped for buildings! We're in the process of applying for planning permission to convert one of our outbuildings into a holiday cottage. Now I'm starting to think about how I can structure that as a business. At the moment I'm not a tax payer so if it's in my name, I'll owe minimal tax on it. But do I need to set it up as a separate business (sole trader) or can I just take the rent as personal income? And if I start selling stuff (fruit, veg, eggs, honey etc.) can I handle that in the same way (either as part of the business or just as personal income? Are there advantages of doing it one way as opposed to another?

Thanks,

Hester

[Fowgill Farm]

Hi hester
Can't help with the business stuff much but we looked recently at putting planning in for converting our byres into two holiday cottages (our pension plan ), but our holding has a clawback clause on it stating any development within 15yrs of buying it would mean we had to pay out the people we bought it off. We bought it 10yrs ago and thought we better re read the deeds with our solicitor who confirmed that even planning would trigger the clause so we've put it on a back burner for another 5 years . Like you it was going to be all in my name and we had thought about just setting up as a sole trader ie me trading as our farm name as that was the easiest thing to do.
Doganjo on TAS is an accountancy guru i think so it may be worth pm ing her.
Good luck
mandy   

[phil_rich]

Hi, it depends if you have any income now? You say you don't pay tax but is that due to no income or an income just under the threshold? You can just take the rent as a personal income and declare as much as you like (obviously I don't recommend keeping anything undeclared, but with cash paying customers...) as a self assessment at the end of the year.

Your best bet is to find a local accountant and call them up and book a consultation. They will all offer a free initial 'chat' and at this point will tell you what's best.

[bazzais]

Being a sole trader and taking the rent as personal income is the same thing.

If the rent drawn from the properties after expenses is less or matches your tax free allowance you still have to do accounts and submit them as 'self employed' or 'sole trader' as you mention but you won't pay tax on your profits.

If the earnings are above the threshold then you will pay income tax on in - you will also have to pay NI.



You may also attract capital gains tax on the sale of the property (as its no longer a part of your house but part of a business)

One good point is that if their is alot of work needed on the property and you have to spend money on it to get it to standards you can ofset it against your income to reduce tax.

One good thing about holiday lets is that you can take cash and put it in your pocket Although illegal - its a fact of life - lol

Baz

[doganjo]

I would recommend a professional person to set everything up for you so that you can then keep it up to date yourself - shouldn't cost much and worth it in the end as there are various allowances you can get for renting out part of your own home.  It's not just as straightforward as taking what rent is left after paying expenses and then paying tax on that.

[bazzais]

Renting as a holiday home is differnet from the allowance given to renting a place in your own home.

The best course of action is to tell as little people as possible about your affairs and getting away with what you can.

Unless you voted for this shower f s**t in power - if so pay whatever you can and wherever you can

[lachlanandmarcus]

Renting as a holiday home is differnet from the allowance given to renting a place in your own home.

The best course of action is to tell as little people as possible about your affairs and getting away with what you can.

Unless you voted for this shower f s**t in power - if so pay whatever you can and wherever you can

Agree with this part  - the rent a room scheme is tax free income up to a limit (5k ish) but is only for a room in your own home, def not separate and def not self contained. Otherwise tax is payable.
Its a lot less painful to pay tax as it falls due than it is to be faced with x years worth if they catch up with you ! - quite apart from prosecution/criminal record. However one feels about the rights and wrongs of the tax rate/system, I would go the above board route......

[Orinoco]

Hi

Just to clarify

Renting a room in your home - you can earn up to £4,250 gross and there is no income tax on this (don't go over though)

A Furnished Holiday Let - this has to be available for let for 210 days of the year and actually let for 105 days and if these conditions are met (there are a few more), then this is treated as a business and entitled to all business expenses and relief's.

Renting out a property full time to the same person - this is not treated as a business in the same way but as you can't claim Principle Private Residence Relief in more than one property per couple when you sell a property you don't live in you will be subject to Capital Gains Tax (unless there is a loss).

When selling a property - advice live fully in any property you will one day want to sell when you first purchase it, (if this is possible) and then live in it again before selling, this allows you to claim all the reliefs and reduce any capital gains tax to a minimum.

Technically if you receive earned income from an untaxed source you need to complete a tax return, so maximise your expenses and create a loss (poss with an interest only mortgage), the loss can either be used to offset taxed income in the year resulting in a repayment or to offset future profits.

Limited Companies have their benefits and downfalls, putting property in a company isn't easy.

National Insurance - a sole trader needs to register for Class 2 NI and then pay Class 4 NI along with their tax at the end of the year, a Director gets to decide how much to take as salary (i.e. min to get a tick for the state pension but not pay NI) and how much to take as dividends (up to the 40% tax bracket so no additional tax to pay after the company has paid Corporation Tax).

Hope this makes sense.

K

[happygolucky]

They get you buy your goolies each and every way......after speaking with loads of small business people it seems the best way is to keep quiet or be a crook....we are not allowed to expand our business at all....so daft, not even by one room...if we did the house up to the standards it should be and that people expect we would have minus  income.....I would agree that you need a good chat with an accountant, ours is the most lovely man and we both can understand him, no jargon, all clear and human and not too pricy!!
P.S. I am always being offered work but then my TAX bill would go up,plus all the extra costs so, until our business is sold, I cannot work unless I get a huge amount in pay as we use our allowance against our business!!

[Orinoco]

All true

but 71% of your net income is yours, so not earning to not pay tax does't make sense, put 29% of your net income above your allowance into a seperate account and tell yourself your employed and thats just what happens.

But I do sympathise, I have had the same discussion with my Dad who is a milk man and fed up of getting hit from different directions (price of milk, tax man, supermarkets etc.).

Don't write off the losses though (so to speak), they have their own value (offset future profits or reduce tax paid in the year) while the business grows to show a profit, this could give you 4 years to increase the profits to a worth while amount, (2 years losses to offset 2 years profits).

Nothings easy though.

K

[Old Shep]

One legitimate tax allowable cost of a holiday cottage is any interest on a mortgage.  You may want to take this into consideration when structuring your finances (eg have more of a mortgage on your holiday cottage than your own home).  If its in interest only mortgage then its 100% allowable.  You do need to run this as a business and note down all your expenditure as you go along, otherwise you will pay tax on any income above your personal allowance.

[goosepimple]

Hester, don't know about your area, but here in Scottish Borders we have something called Business Gateway - don't know if it's national.  They do all sorts of fab 1 day or morning courses free of charge, lunch usually thrown in and they are brilliant to do.  It's all things for starting your own business, e.g. how to do tax returns, how to set up, how to tweet and poke, how to get yourself high on the search engines, etc etc loads of different things, setting up websites etc.  You are given your own contact and they keep in touch occasionally - they can also give you an hour's personal help no charge, its great, worth a look.  You can go on as many mini courses as you like.  My contact gave me several pages of info on setting up as you are, probably something you could google I think, don't know where my copy would be as we are not living in the house presently (living in the future holiday cottage while house being done up!) good luck.

[HesterF]

Thanks all. For some reason I wasn't getting updates on replies so it's brilliant to see so many! Just to clarify, I'm not looking to avoid tax - just that I don't earn anything at the moment so this will be my only income. Therefore virtually all of it will be tax free (i.e. within the first band of tax free allowance) and the rest will be at low level tax (can't remember what the next band is?). And, yes, this is not a room in our house - it's a standalone holiday let but just across our courtyard so we'll never be able to spin it off as a separate house. If and when we sell (in our dotage), it'll be classified as a granny annex rather than a holiday cottage so shouldn't be affected by capital gains.

I phoned up the local chamber of commerce who were brilliant. They put me straight through to somebody who was happy to discuss it there and then over the phone. He confirmed what many of you have said - sole trader is the same as it being my income. So I will be a sole trader - apparently it just takes a quick phone call to the tax office and the paperwork will be no more complex than a normal tax return. Registering as a VAT business makes no sense (there is no loophole where I can reclaim the VAT costs of the build but not charge my guests VAT!). But it's a good thought that I can deduct the costs of setting it up from tax bills (and I can probably spread the bills a little). He also reminded me that I'd need public liability insurance and advised to only employ others on their own self employed basis (e.g. cleaners) so I don't have to pay their NI/tax. Oh, and they run free courses on how to set up a business, write you business plan, market it, manage tax etc. so I guess the same as Business Gateway. At this stage I don't think I need that - it's a very simple plan, we spend lots of money, then we take some rent for a few years (with a few costs thrown in along the way) and eventually our initial investment will have paid back. Only thing we might be able to tweak is that we're financing it through the mortgage on our main house i.e. we took out a bigger mortgage than we needed on the basis it was cheap finance but it does mean it'll be hard to deduct the mortgage repayments from the cost of the holiday cottage. It would be better to have taken out a direct loan just for the business that we could then use to reduce tax - although maybe the rate we'd have got would have been lower. I've got a couple of years to ponder that one before I have to pay any tax if I can deduct the building costs from the profit for a while.

We'll rent it through a holiday rental company to begin with which means we'll pay them a hefty whack but my back of the envelope calculations showed that it would be better to have the sort of occupation a big company could generate while paying them a cut rather than the sort of occupation we could generate. Longer term we might be able to go solo - especially if it goes well enough to think about doing more.

OK, now just got to twiddle my thumbs (and consider boiler options) whilst we wait on a decision from the planners that was due three weeks ago. Grrr.

H

[Orinoco]

Hi

Just a quick point regarding the mortgage interest, the mortgage lender will give you a statement at the end of the year showing the mortgage interest part of the repayments.

If the mortgage was taken out for the purpose of the holiday let business, it doesn't matter what its secured on, its still allowable.

It is worth reading the rules for Furnished Holiday Lets (FHL) as there are benefits to qualifying as a FHL one is the capital allowance treatment (the rules have been changing on these due to the large amounts of tax some where claiming back from HMRC (capital allowances on integral features), the warning though is on the re-sale, but this is only a problem is you are not aware of it.

Property tax is my specialist area plus we have just bought a similar set up and are converting outbuildings to one side of the courtyard now (after we have ripped out everything done by the previous owner which didn't comply with the planning (he had spent huge amounts on work which would never be allowed as didn't comply with building regs and its grade 2 listed, hence an enforcement notice).

Any more specific advice please PM me.

Thanks

K

[goosepimple]

Remember planning and building regs change periodically and that they are different in scotland than england. 
 
Hester - Holiday Lettings allow you to pay a lump sum (and it's not much at all) for a profile on their website and direction to your own website.  I now a few people who use this and get good business off it.  Cottages4you is also popular but their rate is much more expensive, may be worth doing both if you can.  Or charge a bit more and be exclusive to such periodicals as walkers magazines, religious magazines etc, good if you want the 'quieter' types