In recent times, the UK has seen a considerable rise in the number of house owners and investors going into holiday homes and short-term letting business.
Of course, the main reason is that these property investment forms can serve as a significant income source. But then, other benefits, such as being able to stay in for some weeks per year and tax benefits, make it even more attractive.
However, property investment is a serious business, and you must pay attention to other aspects, too, if you truly are to enjoy the benefits of your investment. One part that has proven challenging, especially for inexperienced investors, is understanding holiday let tax issues. Not only will understanding the details help you take maximum advantage of specific benefits, but it lets you stay on the right side of the law with your property business.
If you're new to the property industry or want to learn more about it, you're in luck because this guide will look into everything there is to know about holiday let tax and how owners should deal with it.
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What is a Furnished Holiday Let?
A holiday let or furnished holiday let (FHL) is a specific type of property rental that's popular in the UK and sees owners renting out holiday homes to holidaying individuals, visitors, and tourists on short-term lets.
This letting category comes with special tax benefits and other advantages not available for buy-to-let properties. However, the property must satisfy certain requirements before it can be regarded as a holiday let.
The main property that differentiates holiday lets from residential buy-to-lets rental properties is the treatment of holiday lets as a trading business, unlike the investment treatment of buy-to-lets. These treatments mean both property types are treated differently as far as tax is concerned, making holiday lets eligible for benefits that trading businesses enjoy.
Another key difference is that holiday lets are furnished, like a hotel service. Hence, they're referred to as furnished holiday let properties.
How Does Your Accommodation Qualify as a Holiday Let?
These are the conditions that a property must meet to qualify as a furnished holiday let.
Intention to Make a Profit
To qualify for the status of holiday let, a property must be made commercially available and promoted to make money from it. That means the owner can prove they are letting out the property in exchange for cash on a short-term basis.
Simply advertise the property, let it out, and collect the rent to qualify. It doesn't qualify if you're living within the property or allowing relatives or friends to live without collecting rent from them.
Minimum Property Availability and Occupancy
There are minimum and maximum periods for which your property must be available or let out if it is to uplift as a holiday let.
- The first one is that the holiday let property must be made available for short-term letting to guests for a minimum of 210 days in a year. You and your relatives can visit for the remaining days of the year.
- From the 210 days minimum availability, your holiday home must be rented out for at least 105 days. Again, the days you stay in the property or rent out without collecting rent will not be counted as part of the 105 days.
- The letting out must be short-term, which is fewer than 31 days at a time. If you're letting it out for 31 days or more, the total must not be more than 155 days in a year.
If the property fails to meet any of the requirements above, a property may still qualify through two special options.
If you own multiple FHL properties, you can leverage the averaging election option. This option lets you combine all your holiday lets and use the average occupancy rate instead of individual numbers that may not meet up.
The other option is known as grace election, which grants you a waiver for a year if you cannot meet the conditions if you've achieved the minimum targets in previous years.
However, you must also be able to show that you intend to let the property out by actively marketing the property as or more than you've done in previous years. It is also possible to escape without meeting the targets due to cancellations arising from unforeseen circumstances like Covid-19.
A property that has previously qualified as a holiday let may cease to do so if the property is sold, used for non-commercial occupation, or does not meet letting conditions despite applying for the various elections.
Furnishing the Holiday Home
Another criterion a property must fulfil is that it must be furnished. While there are no furnished holiday let rules highlighting the specific furnishings a property must be fitted with, it is believed that you must provide everything guests need or expect to find in a serviced accommodation.
If furnishing the property sounds like too much work or over-the-top expenses, don't worry. There is a furnished holiday lettings allowable expenses, and you get to deduct the expenses under capital gains tax. We'd explore more about capital gains tax relief in the later part of this article.
We have written an extensive guide to furnishing a holiday let to help you put together the kind of furnishings and amenities that will make your guests feel welcome.
What are the Tax Benefits and Other Advantages of a Holiday Let?
Below, you'll find all the advantages and holiday let business tax benefits your let may qualify for.
Mortgage Interest Relief
Unlike buy-to-let properties, holiday lets qualify for a deduction of their full mortgage interest from profits. This is one of the biggest advantages and differences from buy-to-lets.
The holiday let tax relief has been reduced for landlords who own residential properties, and they have to make do with the basic income tax rate of 20%. In the long run, this means that holiday let owners will pay less holiday homes tax and save more profits.
Capital Gains Tax (CGT)
If you decide to sell your property, you can claim Capital Gains Tax relief through three areas.
- Business Asset Disposal Relief: This is formerly known as Entrepreneurs' Relief. Through it, profits on assets that qualify are eligible for a reduced rate of 10%. Hence, owners of the furnished holiday let properties are charged a lower CGT rate of 10%. In contrast, other properties pay an 18% or 28% rate based on factors like the owner's income level and profit size.
- Business asset rollover: This allows you to delay paying Capital Gains Tax, provided you use the proceeds from selling your holiday home to buy a new one.
- Gift hold-over: This holiday let tax relief is available for owners who sell or give away their holiday home at less than its worth.
Certain capital allowances that aren't available for buy-to-let landlords can be claimed by those who own holiday lets. They include costs spent on improving the standard of the property to luxury with fixtures, furniture, equipment, etc.
This will ordinarily help you increase charges and profits, but you are also allowed to offset the costs against your income from the property. This effectively enables you to pay less holiday let tax and keep more of your profit as personal benefits.
Small Business Rates Relief and Council Tax
Small business rate is a furnished holiday lettings tax to help local services pay for their businesses. Suppose your holiday let is available for at least 140 days in a year. In that case, it will be regarded as a self-catering property and eligible for holiday let business rates relief.
Being classified as self-catering has its downsides because you will have to pay the Business Rates Property tax, but it also makes you eligible to pay a lesser amount of council tax. You can check the HMRC website to know if you qualify for this holiday let tax relief.
The profits you generate from your furnished holiday lets are regarded as relevant for pension purposes. They are classed as Net Relevant Earnings (NRE), which means you get benefits on your pension contributions. You can make pension contributions up to £40,000 or lower total relevant earnings.
Holiday Homes Tax Splitting With Partner
Tax splitting lets you distribute tax payments between partners irrespective of how much ownership each person has. If you share the ownership of the holiday let, you can also fix the profits as you agree for tax purposes, even if it doesn't represent the ownership split over the tax year.
Inheritance Tax Relief
Business Property Relief offers tax-advantaged inheritance planning and is available for furnished holiday lets.
Allowable Furnished Holiday Let Tax Deductible Expenses
As mentioned above, holiday lets are treated like a business, and this holds even when it comes to the expenses you make. Essentially, this means you can offset the expenses against your income.
However, this also has conditions and the expenses you offset cannot be from your capital. For instance, a one-time payment for the construction of the property or the purchase of fixtures during construction will not count. These can be offset through capital allowances.
They can also be claimed only against commercial use. This means you have to calculate what part of your expense is commercial if you use the property for private purposes.
Some of the furnished holiday let tax-deductible expenses allowed include utility bills, advertising and agency fees, loan interests, cleaning products, maintenance costs, etc.
What are the Payable Holiday Let Taxes and Other Disadvantages?
If you operate a holiday let business, you have to pay holiday let business tax on your income from the property as well as bear some other expenses. They are slightly different from what you have to worry about renting out residential properties, and below is a breakdown to help you understand them.
Value-added Tax (VAT)
If the income you make on your holiday let property climbs over £85,000, you are obligated to register for VAT. There is no relief or any means of reclamation for VAT. Registering for VAT means 20% more will be added to the cost of your holiday let, which may make it costly for some.
You may also deduct the costs from your profits. Hence, you do not have to register unless your property makes more than £85000 within a year.
Losses on Your Holiday Property Let
The losses incurred by a holiday let property in a year cannot be offset against your income. However, you can offset it against future profits by carrying the loss forward.
Repairs and Replacements
Since holiday lets are short-term, you'll have to rent to more people over time compared to residential properties. This means your property may be at the receiving end of frequent wear and tear and in need of repairs and replacement from time to time. Nevertheless, you can obtain coverage for the inevitable repairs by opting for a holiday let insurance.
To ensure your holiday let generates income, you have to be ready for extra work compared to residential lets. That is because you need more occupants to meet the required threshold, which means additional marketing, setting up and managing a booking calendar, handling more customer issues, etc.
Holiday lets are increasingly getting popular in the UK, and you can key into it too to increase the revenue from your properties.
However, it's essential that you pay attention to furnished holiday let rules which stipulate the holiday let tax you have to pay or are exempted from.
If you're finding any part of it difficult or would like more information, feel free to reach out to us, and we'd be more than happy to help.
FAQs About Holiday Let Taxes
Do You Pay Council Tax on a Holiday Let in England?
If your property meets all the requirements for classifying property as furnished holiday let (outlined above), you may not have to pay council tax.
Why Do Holiday Lets not Pay Council Tax?
Holiday lets do not have to pay council tax because they qualify for Small Business Rate Relief.
Do You Pay Capital Gains on Holiday Lets?
Yes, but you can pay only 10% if it qualifies for Business Asset Disposal Relief.
What Can I Offset Against Tax on Holiday Lets?
Through capital allowances, you can offset costs spent on improving the standard of your property, such as fixtures, furniture, and equipment.