With an increase in the popularity of owning holiday-related property, understanding the tax laws surrounding furnished holiday lets (FHLs) in the UK is more important than ever. Read on to find out more about the rules surrounding furnished holiday lets and the tax implications and benefits.
In the UK, Her Majesty’s Revenue and Customs (HMRC) has modified the tax laws for furnished holiday lets (FHLs). The government considers FHLs a distinct “trade” and applies different tax rules compared to residential and commercial properties. Here’s a guide for furnished holiday lets to help you understand how these tax laws impact you.
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What Is a Furnished Holiday Let?
A furnished holiday let (FHL) is a specific category of short-term rental property found in the UK, Ireland, and other European countries. Unlike regular holiday rentals, FHLs come with tax advantages and benefits. To qualify as an FHL, you must meet certain criteria, including annual bookings, a specific level of furnishings, and consistent availability for letting.
What Accommodation Qualifies as a Furnished Holiday Let?
Furnished holiday lets are eligible for tax deductions and credits that would otherwise only be accessible to traditional businesses. The HMRC considers a furnished holiday let a “commercial business” and requires the following to qualify for tax breaks.
To be classified as a furnished holiday let, the accommodation needs to be, well, furnished! It should have all the necessary furniture and appliances for your guests to stay comfortably. Think beds, sofas, tables, chairs, kitchen equipment, etc.
A furnished holiday is not just a personal getaway but a commercial venture. It should be available for commercial letting most of the year. In other words, you’re actively seeking to rent it out to holidaymakers regularly rather than keeping it solely for personal use.
To meet the occupancy conditions for a furnished holiday let, you need to satisfy three specific requirements:
- The pattern of occupation condition: The property can’t be rented out for longer-term stays (usually 31 days or more) for more than 155 days a year.
- Availability condition: Your furnished holiday let should be available for letting for a minimum of 210 days a year. This means it should be open and ready for bookings, with no restrictions that prevent guests from renting it. It also means that you don’t count any days when you’re staying on the property.
- Letting condition: Lastly, the accommodation must be occupied by guests for at least 105 days. This excludes long-term rentals of more than 31 days or letting to friends and family.
Meeting these three occupancy conditions demonstrates that your property is actively and genuinely operated as a furnished holiday let.
What Are the Tax Advantages of Owning a Furnished Holiday Let?
If your property satisfies the requirements, you will be eligible for tax breaks that may increase your return on investment and help you develop it into an appealing holiday rental. The benefits of having a property with FHL status include the following:
1. Deductible Expenses
When you have a furnished holiday let, you can deduct certain expenses like maintenance, repairs, and even mortgage interest from your taxable income. So, that fancy new sofa you bought for your guests? Yep, it’s a deduction!
2. Capital Gains Tax Relief
You may be eligible for capital gains tax relief if you decide to sell your holiday let. This means paying less tax on the profit you make from selling your property.
3. Tax-Advantaged Pension Contributions
Owning a furnished holiday let can also give you an extra boost when it comes to your retirement savings. You can make tax-advantaged contributions to your pension using the income you generate from your holiday let.
4. Splitting Tax With a Partner
If you co-own the holiday let with your partner, you can split the income and expenses between you. This could lower the tax amount you both have to pay individually.
5. Small Business Rate Relief
Depending on the location and size of your furnished holiday let, you might qualify for small business rate relief. This means you could get a reduction or even an exemption from paying business rates.
6. Mortgage Interest Rate Relief
If you have a mortgage on your holiday let, you can enjoy relief on the interest you pay. This can help reduce your taxable income and keep more money in your pocket.
Furnished Holiday Let Allowable Expenses
Furnished holiday let allowable expenses are the costs you can deduct from your rental income to reduce your tax liability. These expenses should be directly related to running and maintaining your holiday let. Some common examples include:
- Mortgage interest
- Utility bills
- Insurance premiums
- Repairs and maintenance
- Cleaning fees
- Advertising and marketing costs
- Council tax
- Management fees
These expenses can help offset your rental income and lower your taxable profit.
Furnished Holiday Let Capital Allowances
Furnished holiday let capital allowances refer to the tax deductions you can claim for the depreciation of certain assets within your holiday let. These allowances allow you to offset the costs of buying and maintaining qualifying assets against your rental income.
Common examples of assets that qualify for capital allowances include furniture, appliances, fixtures, and fittings. So, if you buy a new couch, TV, or kitchen appliance for your FHL, you can get a capital allowance for a part of the cost.
What Are the Disadvantages of Owning a Furnished Holiday Let?
While owning a furnished holiday let has its fair share of advantages, it also has potential disadvantages. They include:
Furnished Holiday Let Losses
Sometimes, the costs of running your holiday let can be more than what you earn from renting it out. These losses cannot be used to reduce taxes on your other income, which means you might end up with a financial loss.
VAT on Your Holiday Let
You may be required to pay value-added tax (VAT) on any profits over a particular threshold from renting out your furnished holiday let. You’ll have to register for VAT, charge your guests extra money, and handle additional paperwork.
What Happens if You Do Not Reach Your Furnished Holiday Let Occupancy Levels?
If you fail to meet the required 105-day occupancy condition, you may lose some tax advantages associated with a furnished holiday let. However, there are two handy options available (known as elections) that can help:
- Averaging election: If you’ve more than one FHL property, you can average the occupancy rate across all properties.
- Period of grace election: You can request a grace period for up to two years if your property meets the occupancy criteria for some years but not others.
You must show that you tried to meet the standards but failed due to exceptional reasons like illness or unexpected repairs to qualify for the period of grace election.
Get Tax Advice on Furnished Holiday Lets Through Ds Burge & Co.
Navigating the world of property taxes for furnished holiday lettings can be a daunting task.
At DS Burge & Co, we understand the complexities of running furnished holiday lettings. Get in touch today for personalised tax advice to ensure you’re maximising your FHL.