The tax advantages of owning a Furnished Holiday Let
Demand for self-catering holiday accommodation in Suffolk has never been higher as the pandemic forces even the most seasoned of travellers to opt for a staycation instead.
The efficient vaccine rollout has given us all hope of a ‘normal’, or close to normal, summer here in the UK, but other countries are lagging behind and it could be some time before it is considered safe to jet around the world.
With most holiday homes fully booked for the rest of the year and prices rising with demand, the concept of investing in a seaside cottage or rural retreat as a furnished holiday let (FHL), or using a second property you already own as a holiday let, becomes very favourable.
Property is often considered a good long-term investment and owning a holiday let can give you a new income stream, either seasonally or year-round depending on the location.
There are several tax advantages to owning a FHL over a normal residential rental property plus you get to choose the prime weeks for your own holiday, or you can escape for the odd weekend when there is a lull in bookings.
What counts as a Furnished Holiday Let?
For a property to be classified as a FHL, and retain that status, a series of criteria must be met. The property must be:
- In the UK or EEA
- Furnished to a degree which allows for normal occupation
- Let on a commercial basis
In addition, there are three occupancy conditions which must be met in the tax year, or within the first 12 months for new FHLs (within the final 12 months where letting ceases)
- Pattern of let – The property will not be classed as an FHL if there are more than 155 days a year spent in long-term occupation lets. These are lettings for a continuous period of more than 31 days.
- Availability – It must be available for commercial letting to the public for at least 210 days a year, excluding days you stay at the property
- The property must actually be let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Any days let to friends or family at a reduced rate cannot be counted towards this total.
There is some leeway if you have not met the 105 days as HMRC offers the option of averaging election and the period-of-grace election.
Averaging election can be used where you own more than one FHL. If one property falls short of the 105 days, you can elect to apply the letting condition to the average rate of occupancy for all FHLs.
The period-of-grace election allows a property to qualify as an FHL even if the letting condition isn’t met, provided the pattern of occupation and availability conditions are met.
For this to apply, you must have had a genuine intention to let the property in the year but, despite your best endeavours, could not do so for the required number of days – for instance there was a national lockdown during the pandemic.
To make the election, the property must have met the letting condition in the previous year. You may then make a period-of-grace election for two consecutive years, but if it still does not meet the letting condition in the following year, the FHL status will cease.
The averaging election and period-of-grace election can be made up to one year after 31 January following the end of the tax year in question.
What are the tax benefits of FHLs?
The letting of furnished holiday accommodation is treated for certain purposes as a trade and therefore the tax treatment is very different to that of a residential let.
- If you let a property that qualifies as a FHL, the profits from the rental business will count as earnings for pension purposes.
- You can deduct expenses, such as letting agent fees, cleaning, advertising and utility bills, against rental income where they relate to the trade of being a FHL and aren’t capital in nature, however, you must deduct a percentage of these fees if you are using the property for your own holidays.
- Interest and finance charges on any loans associated with the FHL are allowable expenses and it is possible to deduct any plant and machinery capital allowances for purchases such as furniture, equipment or fixtures before arriving at your taxable profit/loss.
- If the property is owned by several partners, the rental profits can be split according to preference, rather than having to follow the actual ownership percentage.
- When you come to sell your FHL, you could qualify for business asset disposal relief as long as the gain falls within your £1m lifetime limit meaning you will only be taxed at 10% on the entire chargeable gain. Those selling a residential property are taxed at 18% or even 28%, depending on the seller’s marginal tax rate.
- An FHL also qualifies for business asset rollover relief and relief for gifts of business assets, which allow any capital gains tax to be deferred to some degree to a future date.
Calculating your profit or loss
Profit or loss from a UK FHL must be calculated separately from any other rental properties you may have, and you cannot offset any loss from an FHL trade against any other property rental profits or European holiday lets. Essentially losses can only be carried forward against profits of the same FHL trade
Also, if taxable turnover from your FHL exceeds £85,000 over the next 12 months, you might need to register for VAT. If you are self-employed or VAT registered already then your FHL income may be subject to VAT even if it is below the threshold – our team can help you with this.
Covid-19 & FHL status
The pandemic has meant many FHL owners have been unable to meet all the criteria for operating as an FHL through no fault of their own.
It is hoped the two consecutive annual period-of-grace elections will be enough to ensure most FHLs can continue to qualify, provided the vaccination programme is a success and we avoid any further lockdowns.
When a property stops being an FHL
Your property will no longer be a FHL if the:
- Property is sold
- Property is used for continuous private occupation
- FHL letting conditions are not met, even with the averaging and period-of-grace elections.
When this happens you are no longer eligible for the specific tax benefits afforded to owners of FHLs, and that could leave you with a larger tax bill than you anticipated. If you are thinking of selling or are in danger of not meeting the FHL conditions then speak to us early to allow us to help you plan for this.