Holiday Let Tax Breaks and Financial Pros and Cons
Owning and renting out a holiday let can be very worthwhile. It not only ensures that your family and friends have a good time guaranteed during your holidays, but it also gives you the opportunity to earn some extra money.
In this post, we’ll go over the many benefits – and potential drawbacks – of becoming a Furnished Holiday Let (FHL) landlord, as well as what this means in terms of tax and your personal finances.
A FHL (furnished holiday let) is a type of rental property classification in the United Kingdom and Ireland (and other European countries). Owners of such properties can often benefit from this classification in terms of taxation over a standard buy to let property.
To be classified as an FHL, a property must meet certain criteria, including availability, actual bookings, and the level of furnishings.
If your property meets the following criteria, it may qualify as a Furnished Holiday Let:
Meets Location Requirements
To be considered a furnished holiday let, your property must be located in either the United Kingdom or one of the European Economic Area (EEA) countries, which includes all European Union members (EU).
It Needs to Be Furnished
Although this may appear to be self-evident, it is a requirement. The rules aren’t clear on how much your property needs to be furnished, but if you aim to provide everything you’d expect from a self-catering holiday cottage, you’ll be fine (and some of these costs may qualify for Capital Gains Tax relief).
You Let with The Intention of Making a Profit
The property must be rented out commercially in order to make a profit. It is not necessary to make a physical profit; what matters is your intent.
This will be easier to prove if you can produce a business plan or if you’ve made your property available through a professional holiday letting agency.
It Needs to Be Available to Let
Your property will effectively be in a ‘probationary’ period for the first 12 months of being an FHL. During this time, your property’s potential and actual availability will be assessed, and in order for your FHL status to become a more permanent feature, your property must:
- Be available to rent for 210 days (30 weeks),
- Actually be let for 105 days (15 weeks) as a commercial holiday property
- If occupied for more than 31 days by the same person/people, there must not be more than 155 days of these longer lettings in total throughout the year.
Any days spent in the property for free or at a reduced rate by you, your friends, or family do not count toward the total commercial occupation requirements.
While this requirement appears to be quite strict, there is some leeway if you are:
Unable to meet the required occupation numbers
These figures can be averaged across multiple FHL properties, but properties in the Republic of Ireland are treated differently than those in the rest of the UK.
After your ‘probationary’ period, you are unable to meet the actual occupation figure
If you met the occupation requirements the previous year, you may be granted a grace period (for a maximum of two consecutive years). This means you’ll keep your FHL status if you continue to meet the occupation requirements.
When does a property cease to be a furnished holiday let?
If a property meets one of the following criteria, it is no longer considered an FHL:
- The house has been sold.
- The property is currently occupied by a private individual.
- The letting conditions, such as election averaging and grace period elections, have not been met.
What are the Tax and Financial Advantages of a Furnished Holiday Let?
Tax Deductible Holiday Let Expenses
Unlike a standard buy to let property, you can claim capital allowances on a furnished holiday let. This means you can deduct the cost of upgrading your cottage to a luxury level (and thus increasing your potential rental income) from your pre-tax profits.
Retirement Planning Advantages
Income generated from an FHL property qualifies as “relevant earnings,” allowing you to contribute to a tax-advantaged pension plan.
Advantages at Sale Time
There are advantages over a standard buy to let property if you sell a furnished holiday let too. Should you do so, you can claim certain Capital Gains Tax (CGT) reliefs. These are unavailable to standard long-term rental properties and include:
- Entrepreneur’s Relief
- Business Asset Rollover Relief
- Gift Hold-over Relief
Split the Profits Your Way
Profits from your FHL can be distributed flexibly between you and your partner for tax purposes if you own it together. Profits from long-term rental properties are divided according to the official ownership split (eg. If you owned 50 percent of the property, you would share 50 percent of the profits). You can split the profit however you want with an FHL property.
Council Tax Breaks
Business Rate property tax applies to self-catering accommodation in England that is available for short-term lettings for more than 140 days in any given year.
This category includes all FHL properties that must be available to rent for a minimum of 210 days. This isn’t all bad news, though, because you can apply for Small Business Rate Relief, which can save you up to 100% depending on where you live. You would not be required to pay council tax in this case.
If you own self-catering accommodation in Wales, you can claim Small Business Rates relief if the property is available for letting for up to 140 days a year and is actually only let out for 70 days.
You may be required to pay business rates if you own self-catering accommodation in Scotland. You should check with your local government to see if you qualify for Business Rates Relief, as the process differs from that in England.
Furnished Holiday Let Disadvantages
VAT
The temporary reduced rate of VAT of 5%, announced as part of Rishi Sunak’s 2021 budget announcement, will be extended until September 30th, 2021. It was also announced that a new 12.5 percent VAT rate will be in effect from October 1st, 2021, to March 31st, 2022.
If the revenue from your FHL property portfolio exceeds the VAT threshold, you must register for VAT. If you own an individual FHL property, you’ll need to rent it for more than £1,635 per week for the entire year (52 consecutive bookings) to reach the current VAT threshold of £85,000 per year. Make sure you do the math, but you’ll almost certainly need multiple FHL properties before VAT becomes a consideration.
If you earn more than £85,000 per year from guests, you must register for VAT and pay the standard rates. This necessitates paying an additional 20% (or the temporary reduced VAT rates) on top of the fee you charge guests to stay.
Your FHL property income may be subject to VAT if you own a separate business and are a VAT registered individual.
Loss Deduction Disadvantage
FHL losses cannot be offset against other sources of income; instead, they are carried forward and offset against future profits. These losses can build up over time and be carried forward.
Business Rates
Depending on which country of the union a property is in, the criteria for determining whether or not you must pay business rates for furnished holiday lets varies. If your furnished holiday let qualifies for business rates, the Valuation Office will determine the rateable value of your property based on its type, size, location, quality, and the expected rental income.
Although business rates may disadvantage owners of multiple holiday lets in some cases, business rates for holiday lets may be advantageous to you. Small Business Rate Relief may be available if you only let one property and its rateable value is less than £15,000.
Furnished Holiday Lettings Allowable Expenses
Your FHL property is treated similarly to a business when it comes to expenses. This essentially allows you to deduct expenses from your income. The following are two critical points:
Expenses must be for commercial purposes only. If you, your family, or friends use your property, part of the cost will be considered “private use.” This means you’ll have to figure out how much of the expense is commercial.
If you use the property privately for three months of the year, for example, only 75 percent of your expenses will be considered commercial.
Allowable expenses include the following:
- Bills for utilities or garbage collection
- Interest on mortgages on your FHL properties
- Fees for advertising or letting agents
- Items you buy for use at the property (cleaning products and welcome packs)
- Cleaning and maintenance costs
- Insurance that is pertinent to your FHL (e.g. public liability, buildings and contents insurance)
Extra Financial Support Post COVID-19
Although the restrictions still in place on foreign travel mean that business is certainly picking up for domestic furnished holiday lets, the COVID-19 pandemic has had a significant negative impact on a variety of industries, including the holiday rental industry. The government introduced a number of financial assistance schemes to help holiday let owners get back on their feet.
Claiming them can be complex though, so you should consult with an accountant to help you determine which might apply to you and how to claim them. Pearl Lemon Accountants can help. Contact us here to discuss your needs.
FAQs
Do you pay council tax on furnished holiday lets?
No, you do not.
What qualifies as a furnished holiday let?
To qualify as a furnished holiday let, the property has to be furnished and commercially let for 210 days per year. The property must also be let for at least 15 weeks (105 days) out of the year. However, you can use it for 22 weeks out of the year yourself.
What expenses can I claim for a furnished holiday let?
There are quite a few expenses that can be claimed for an FHL. Those include cleaning and maintenance costs, utility bills, products purchased for the FHL property, etc.
Looking for more information? Let’s chat!
How are furnished holiday lets taxed?
The profits you make on holiday let will be counted as a form of income and taxed as such. It will also become a part of your tax assessment.
Need more clarification? Let’s chat!
How much tax do you pay on holiday let income?
Owners of FHL properties pay a lower CGT (Capital Gains Tax) rate of 10%.
