Section 24: Mastering Serviced Accommodation with Penelope Walters
Last updated: 27 Sept 2024
Meet Penelope Walters
In this episode of Deal Finder’s Corner, we welcomed Penelope Walters, a chartered accountant with over 20 years of experience in the property sector. Penelope is also the director and principal accountant at IT Montic, providing specialised accounting solutions for property investors. Her vast experience, particularly in navigating the complex tax landscape for landlords, makes her the perfect expert to share strategies for mastering serviced accommodation and understanding the impact of Section 24.
Understanding Section 24 and tax benefits
Penelope began the discussion by highlighting the significant challenges landlords face, particularly those affected by Section 24, which altered how mortgage interest is taxed. Introduced in 2015, Section 24 has pushed many higher-rate taxpayers into negative cash flow situations, making it difficult for landlords to remain profitable.
One of the key messages Penelope emphasised was the importance of understanding taxable profit, which differs from the profit most landlords calculate. She shared the example of a higher-rate taxpayer who, due to Section 24, ends up paying more in tax than they earn in profit - a situation affecting many property owners today.
"It's really important to have a property accounting specialist. Tax law is vast, and having an expert ensures you're making the most of available tax benefits.”
Penelope explained that shifting from traditional buy-to-let models to serviced accommodation or furnished holiday lettings (FHL) offers numerous tax advantages. These include the ability to fully deduct mortgage interest, claim capital allowances, and even defer capital gains tax through business asset rollover relief.
Furnished holiday lettings are treated as trading income, not investment income, which allows landlords to enjoy greater tax relief. However, the property must meet specific criteria, such as being available for let 210 days a year and rented out for at least 105 days to qualify.
"One of the most significant benefits of furnished holiday lettings is that mortgage interest is fully deductible," Penelope explained.
She also cautioned landlords about the additional effort required to manage serviced accommodation, as it is more labour-intensive than traditional buy-to-let. However, Penelope pointed out that landlords can appoint management agents to handle the day-to-day operations, though this would reduce the profit margin.
"The benefits of furnished holiday lettings are that taxes are paid on income after deducting costs. The more costs you can deduct, the lower your taxable profit, meaning more retained income."
Key considerations for serviced accommodation
Penelope went on to outline the specific tax criteria landlords must meet to benefit from furnished holiday lettings. These include:
Furnishing requirements: The property must be fully furnished to a standard suitable for short-term stays.
Location: The property must be in the UK or the European Economic Area (EEA).
Commercial basis: It must be let on a commercial basis, meaning the primary intention is to make a profit.
Occupancy conditions: The property must be available for at least 210 days a year and let out for 105 days as a furnished holiday letting.
Penelope also addressed common misconceptions, such as the difference between taxable profit and retained profit, and why landlords should focus on maximising deductible expenses rather than incurring costs just for tax relief.
Actionable tips for property investors
Penelope shared several actionable strategies for property investors considering switching to serviced accommodation:
Conduct a tax efficiency analysis: Before making any changes, landlords should conduct a detailed cost-benefit analysis to determine if the tax savings outweigh the costs of converting to a serviced accommodation model.
Explore incorporation: Penelope noted that incorporating your property business into a limited company could offer long-term tax advantages, particularly for higher-rate taxpayers. However, this comes with its own set of costs, including stamp duty and legal fees, so it’s essential to evaluate whether this is a viable option for you.
Understand capital allowances: Take advantage of capital allowances for furnishing your property. Items like beds, sofas, and washing machines can be claimed in the year of purchase, significantly reducing your taxable profit.
"Don’t increase your costs to get tax relief. Only incur costs that are beneficial to your business," she advised.
Conclusion
Penelope’s insightful talk underscored the potential for property investors to optimise their tax situation through furnished holiday lettings and other tax-efficient strategies. She highlighted the importance of understanding Section 24, mortgage interest relief, and the broader implications of property taxes. Whether you're a landlord struggling with recent tax changes or a property investor looking for ways to maximise your returns, Penelope's advice offers practical, actionable strategies.
For those interested in exploring these tax strategies further, Penelope offers a 30-minute free consultation. Reach out to her for expert guidance on navigating the complex world of property taxes.
Want to dive deeper into property investment strategies? Watch the full episode of Deal Finder’s Corner with Penelope Walters on YouTube and subscribe to our channel for more expert insights.
