In terms of Capital Gains Tax (CGT), a normal residential let property is classed as an investment. However, a...
Owning a holiday let can be very advantageous. Not only does it provide enjoyable holidays for your family and friends, it also provides a potentially lucrative additional income. In this post, we explore the many advantages of becoming a Furnished Holiday Let (FHL) and explain what this means for you when it comes to tax.
What is a Furnished Holiday Let?
What are the advantages of a Furnished Holiday Let?
What are the potential disadvantages of a Furnished Holiday Let?
What are Furnished Holiday Lettings allowable expenses?
How to qualify to be a Furnished Holiday Let
A Furnished Holiday Let, also known as a FHL, is a certain type of rental property classification in the UK and Ireland (and other European countries). This classification provides certain tax advantages to holiday let owners. There are specific requirements a property needs to meet in order to be classed as a FHL, such as its availability, actual bookings and level of furnishings.
Capital allowances can be claimed on your FHL property. This means the cost of kitting out your cottage to a luxury standard (and in return, increasing your potential rental income) can be deducted from your pre-tax profits. This isn’t an option available for long-term rental properties.
For more information on capital allowances, view the HS252 Helpsheet.
Income generated from a FHL property is classed as ‘relevant earnings’ which means you can make tax-advantaged pension contributions.
For more information on this, see the HS253 Helpsheet
If you should come to sell your FHL property, you are able to claim certain Capital Gains Tax (CGT) reliefs. These are unavailable to long-term rental properties and include:
If you share the ownership of your FHL with your husband or wife, profits can be flexibly distributed between you both for tax purposes. With long-term rental properties, profits would be distributed according to the official ownership split (eg. If you owned 50% of the property, you would share 50% of the profits). With a FHL property, you can portion the profit however you decide.
For more information, see this Trusts, Settlements and Estates Manual.
A self-catering accommodation which is available for short-term lettings for more than 140 days in any given year, is subject to Business Rate property tax. Since all FHL properties must be available to let for a minimum of 210 days, they fall into this category. However, this isn’t necessarily bad news as you can claim Small Business Rate Relief, which can be up to 100% (dependent on what area you are in). Therefore, goodbye to council tax!
If your turnover from your FHL property portfolio exceeds the VAT threshold, you will need to become VAT registered. If you own an individual FHL property, to exceed the current VAT threshold you will need to let your property for over £1,635pw, for the entire year, (52 back-to-back bookings) equating to £85,000 in total per year. Be sure to do the maths, but you’ll most likely need multiple FHL properties before VAT becomes something you would need to consider.
If your income generated from guests exceeds £85,000 per year, you must register for VAT and pay the standard rates. This requires you to pay 20% above the fee that you charge for guests to stay.
If you run a separate business and are a VAT registered individual, your FHL property income may be subject to VAT also.
For more information on VAT, see here.
Losses from a FHL business cannot be offset against other income, instead, FHL losses are carried forward and offset against future profits. These losses can accumulate and be carried across multiple years.
The criteria that decides whether or not you must pay business rates for furnished holiday lets changes depending on which country a property is in. Read our guide on business rates for holiday lets for more information on this.
If your furnished holiday let qualifies for business rates, the Valuation Office will calculate the rateable value of your property according to its type, size, location, quality and how much income you are likely to receive from letting it.
Although owners of multiple holiday lets may be disadvantaged by business rates in some cases, business rates for holiday lets could be of an advantage to you. If you let just one property and its rateable value falls below £15,000, then you could be eligible for Small Business Rate Relief.
When it comes to expenses, your FHL property is treated similar to that of a business. This basically allows you to offset expenses against your revenue. Two crucial points are:
Here are some examples of allowable expenses:
If you’re looking for advice on how to calculate your taxable profits, view the HS222 Helpsheet.
Your property can qualify as a Furnished Holiday let if it meets the following criteria:
To qualify as a furnished holiday let, your property must sit within one of the countries that make up the European Economic Area, which includes all members of the European Union (EU). Following the United Kingdom’s withdrawal from the EU, it will continue to be a part of the EEA during the transition period, which runs until 31st December 2020.
Although this may seem a little obvious, it is part of the requirements. The rules do not specify to what extent your property must be furnished, but if you aim to provide everything you would expect from a self-catering holiday cottage, then you’ll be on safe ground (don’t forget, some of these expenses can fall under Capital Gains Tax relief). An experienced holiday letting agency will be able to advise you on how best to achieve this.
The property must be let commercially with the intent of making a profit. It is not essential to physically make profit, it’s your intent that counts. If you’re able to produce a business plan or if you’ve made your property available through a professional letting agency (such as ourselves), then this will be easier to prove.
For the first 12 months of being a FHL, your property will effectively be in a ‘probationary’ period. During this time, the potential and actual availability of your property will be reviewed and for your FHL status to become a more permanent feature, in the first year your property must:
Days you, your friends or family spend in the property, for free or at a discounted rate, do not count towards the total commercial occupation requirements.
While this requirement may seem rather strict, there is some reasonable flexibility if you are:
A property no longer qualifies as an FHL if it meets one of the following criteria:
For more information on FHL requirements, view the HS253 Helpsheet.
* At the time of updating (9th March 2020), Sykes Cottages has taken all 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. Generic information is contained within this article and each individual’s tax affairs are different, further advice should be sought from an accountant.
Information partly provided by Innes Reid, a Chester financial advice firm offering independent guidance for both private and corporate clients.
*Based on a 7 bedroom property in the Lake District with bookings between October 2017 to September 2018.
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