What to do with your holiday home

If you are lucky enough to own a holiday home, you might be wondering what to do about it long-term. For example, will you give it to your children?

The problem is around Capital Gains Tax. If you simply pass your holiday home to your descendants as a gift, it counts as a disposal. You have to disclose the transaction to HMRC, the gift crystalises the gain, and you have to pay CGT. The children don’t pay the tax, so it’s doubly generous. You’re giving them your holiday home, and paying their tax bill too.

Some might think that’s a silly idea, so here’s a way to get more control.

You can gift all or part of your holiday home into a Trust. This defers the capital gain until the Trustees sell the property by applying for holdover relief (however, you’d need to speak to your accountant about that). This may sound harsh, but if you’re dead by then, paying the tax on it won’t be your problem!

The advantage of putting the property into a Trust is that your children won’t own it. That means that this valuable asset is protected from any potential divorces and bankruptcies they might experience.

Of course, it’s not quite as simple as that.

To avoid inheritance tax, you have to survive seven years after putting it into a Trust, because it is still treated as a gift. (After seven years, it’s OK, because it is excluded from your estate by then.)

If the value of your holiday home is greater than £650,000 (for a couple gifting into a Trust), then advance inheritance tax will be due at 20% on the value greater than £650,000. The limit is £325,000 for a single person. As you can see, it is probably best to stick to those limits. To do that, you don’t have to give away the whole thing; you could gift only part of the holiday home.

Note that you don’t want to contravene the ‘gift with reservation’ rules. If it’s a gift, you’ve given it away, and you can’t just go and stay there whenever you want to. If you do so, each time you use the holiday home you must pay a market rent on the proportion you have gifted to the Trust.

P.S. Admittedly, what to do about your holiday home is a #FirstWorldProblem, but we hope this insight is useful.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100