Although property investment has consistently remained a popular choice in the UK, there has been a recent increase in the number of investors expanding their portfolios to encompass furnished holiday lets.
This trend can be attributed to various factors, such as higher yields and convenient market entry, facilitated by online platforms like Airbnb and cottages.com. This move signifies a departure from the previous reliance on conventional local letting agents. Another factor for this change has been the need to make property portfolios more tax efficient, especially for landlords in the higher rate tax band with properties that have borrowings on.
Furnished holiday lets can be tax efficient due to mortgage interest being treated as an expense, offering higher rate tax relief, unlike basic rate relief for other buy-to-let properties. Capital allowances can be claimed for fixtures and fittings, reducing taxable income and, in certain scenarios, can yield capital gains tax advantages.
This blog looks at the implications of a personally owned furnished holiday let, which is subject to taxation via self-assessment rather than through a limited company. To find out more about the tax implications of owning property both personally and as a limited company, please take a look at our accounting services for landlords.
What is a furnished holiday let?
A furnished holiday let is a property which is let out for short-term occupation – typically, this is a self-catering property let as a holiday home. The property is normally fully furnished with adequate facilities to provide a comfortable stay.
Furnished holiday accommodation can include properties that are not rented to holidaymakers, providing the property qualifies.
Holiday let taxation differs, as HMRC classifies furnished holiday letting income as a trade, in contrast to other property income, which is treated as investment income.
How do you qualify for a furnished holiday let status?
To qualify as a furnished holiday let, the following 5 requirements need to be met:
- Availability and letting condition
The property must be available for commercial holiday letting to the public for 210 days in the tax year. You must let the property commercially for 105 days (15 weeks) during the tax year. One part of the legislation that catches some owners out is where the property has been let on a longer term of over 31 days. These days do not count towards the 105-day requirement.
- Pattern of occupation
The property can not be let to the same person for more than 31 continuous days during any period of the tax year.
- Furnished requirements
The property must be adequately furnished and include enough furniture for guests to use and live comfortably. This includes the basic amenities such as beds, seating, cooking facilities and storage.
- Commercial intent
The primary purpose of letting the property should be to make a profit. You need to be actively promoting the property for furnished holiday letting purposes. You will not qualify if you are living in the property and only letting family and friends stay rent-free.
The property needs to be located within the UK or the European economic area.
There are certain elections that could be made, such as the period of grace and averaging if a property does not qualify. However, if these requirements are not met, then the property is treated the same as long-term rental properties for tax purposes.
What are the tax advantages of running furnished holiday lets?
Due to furnished holiday lettings being classed as trading income, the way you pay tax is different to other buy-to-let properties.
Holiday let tax does have certain tax advantages, and these include:
The main tax advantage is the treatment of loan interest. Interest payments are treated as an expense of the property business, resulting in a deduction from pre-tax profits. The tax relief is therefore given at the same rate as the rental income rather than at a flat 20% as applied to other residential properties.
The other income tax benefit is the ability to claim capital allowances on fixtures and fittings within the property. Capital allowances are the mechanism by which tax relief is given for the cost of furnishing the property. Not only can you make a retrospective claim, but capital allowances are also optional, so can be a useful mechanism to ensure tax efficiency, i.e. you are paying tax at the lowest possible rate.
As holiday lets are considered trading businesses for tax purposes, more allowable expenses apply. These include items such as TV subscriptions, Welcome Packs, and telephone and internet costs. By claiming all allowable expenses, you can effectively reduce the amount of tax you will pay.
Capital Gains Tax relief
Furnished holiday lets may qualify as eligible business assets for business asset disposal relief (previously entrepreneurs relief). If the property meets the criteria, you will pay capital gains tax at a rate of 10% rather than rates of 18% or 28%.
If you reinvest the proceeds from selling your holiday home into another furnished holiday let, you could qualify for business asset rollover relief, which delays paying the capital gains tax.
When a property has been given away or sold for less than it is worth, then gift holdover relief can apply.
Rental income generated from furnished holiday lettings counts towards the net relevant earnings for pension purposes, so it can increase the level of allowable annual pension contributions. Pension contributions can also offer tax advantages. This is the only income from property that enables you to make tax-advantaged pension contributions.
Whilst HMRC’s main stance is that most furnished holiday lets will not qualify for business property relief, there are some circumstances where business asset property relief will apply. This can result in significant savings on inheritance tax.
Are there any drawbacks to running furnished holiday lets?
From a tax perspective, the main drawback of operating a furnished holiday let is related to VAT, as holiday accommodation falls under VATable supplies. If the collective income from all your holiday lettings goes over the VAT threshold, then you will need to register for VAT. This can be one of the biggest costs incurred.
You do not pay council tax on holiday accommodation; instead, they are subject to business rates. Whilst most landlords with one property will qualify for small business rate relief if the rateable value is above the exemption, those with multiple properties may face supplementary business rates as an additional cost to the letting business.
On a practical note, managing holiday accommodation is more time-consuming than traditional buy-to-let properties.
Consult with a property tax expert at Spotlight Accounting
At Spotlight Accounting, due to the complexities surrounding holiday let taxation, we would advise that you seek expert advice.
With our extensive experience in assisting landlords who rent out holiday accommodation, we specialise in guiding you through the various taxes, ensuring you have the best property structure in place and will make sure that you have everything you need to manage and maximise your holiday let taxes.
If you need assistance or advice, then why not book a free discovery call and speak to one of our furnished holiday let specialists?
Furnished holiday lets can be a great way to increase potential rental income and come with certain tax advantages. However, it is a complex area, and professional advice should always be sought so you do not fall into a taxation trap.
If you’re starting out in property or want to learn more, read our useful blogs and guides: