A Tax Guide to Furnished Holiday Lets: 2019/2020
If you are looking to invest in a second property, then buying a holiday let could be the perfect option for you. Not only does owning a holiday home have personal benefits (such as convenient getaways with family and friends), but there are great financial benefits too – including numerous tax advantages.
In this article, we explain the advantageous tax implications of owning a Furnished Holiday Let.
What is a Furnished Holiday Let?
In order to reap various tax benefits, your property must be regarded as a Furnished Holiday Let (FHL). An FHL is a specific type of rental property and to qualify as an FHL, there are certain criteria that your property must meet.
What constitutes a Furnished Holiday Let?
Your property will qualify as an FHL only if it adheres to certain regulations.
HMRC has published guidelines on what constitutes an FHL, which include a number of occupancy conditions, all of which must be met. According to HMRC: ‘Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year.’ This does not include any time that you, the owner, are staying at the property.
You also have to consider the pattern of occupation. While you are permitted to rent out your holiday home for a longer term (defined as 31 days or more), there are limits; the total of your longer lettings cannot exceed 155 days in the year.
Your property is expected to be furnished to a high standard. In other words, it must be home to all of the necessary furniture that guests would expect for a comfortable stay. What’s more, guests must be permitted to use all of the furniture in your holiday home.
Intention to generate a profit:
Regardless of what income you actually generate, your intention to make a profit should be clear – meaning that that your holiday home must be let commercially. According to HMRC’s rules: ‘You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.’
Once your property has been classified as an FHL, you can benefit from specific tax rules, including:
As with any business, profits generated by your holiday let will be subject to income tax. However, your income tax can be reduced, legitimately, in numerous ways.
If you have a mortgage on your FHL, you will be subject to paying interest. However, with a holiday home mortgage, there is no limit on the amount of mortgage interest that you can offset against your profit. As a result, your income tax bill could be reduced significantly!
With traditional buy to lets, if you are running the property as a husband-wife team, each owning 50% of the property, then you can divide the profits by the same percentage. However, a little known advantage of FHLs is that regardless of the ownership split, FHL profits can be allocated between owners however you like. So, if one partner pays higher income tax, they don’t have to declare any of the profits in their name, but instead allocate all the returns to the other partner. See here for more information: https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9820
You can claim capital allowances on your FHL, for necessary items such as furniture and fittings. The cost of these items can be deducted from your profit, thereby reducing your income tax bill. Allowable expenses could be anything from bedding and electrical equipment, to a new sofa.
If your property is considered to be an FHL, according to HMRC: ‘The profits count as earnings for pension purposes.’ In other words, you can make contributions towards your pension, at the same time reducing your profits and therefore your income tax bill.
Capital gains tax:
When you sell your property, if it qualifies as an FHL, you can benefit from capital gains taxes, including Entrepreneurs Relief. This can reduce the tax on the sale of your property to just 10%.
If you own an FHL, your property will be classed as a business and it will, therefore, be subject to business rates and you will no longer be required to pay council tax. This is mandatory and is not an option.
Before you panic and think that this is a bad thing, then consider this: business rates can work out cheaper than council tax, and this can generate significant savings.
Some properties will be eligible for discounts on their business rates. In England, you are eligible for Small Business Rate Relief if your property’s rateable value is less than £15,000. If your property’s rateable value is £12,000 or less you do not need to pay business rates, while properties with a rateable value of between £12,001 and £15,000 will be eligible for relief on a sliding scale from 100% down to nothing.
Small Business Rate Relief https://www.gov.uk/apply-for-business-rate-relief
Note: We have taken reasonable care to ensure that the information contained in this article is accurate. However, no warranty or representation is given that the information is complete or free from errors or inaccuracies. For tax advice, please speak to your accountant.