Furnished holiday let ownership and tax considerations

Tax implications of holiday let ownership can be a complex area. 

For example, for tax purposes, a holiday let is regarded as a business rather than an investment, meaning owners of holiday lets can deduct the entire cost of their mortgage interest with regards to tax relief. 

Outlined below are some more key areas you should consider to maximise your tax efficiency.*

Download a free letting guide and discover more about how we can help deliver letting success for you.

Or read on to discover more about furnished holiday let ownership.

Rental statement for holiday lets 

The profit from a holiday let is calculated in the same way as other commercial buildings: that is, you pay income tax on the rent, less a deduction for allowable expenses. This rental statement is normally prepared for the year to 5th April, and the tax payment would generally be half on 31st January and half on 31st July in the following year. So, for the year ending 5th April 2022, you would pay half the tax on 31st January 2023 and half on 31st July 2023.

Tax-deductible allowable expenses 

There are many expenses that you can claim and they include repairs, mortgage interest, cleaning, laundry, heat and light, broadband, water and business rates, letting commission, welcome pack, replacement furnishings and furniture, travelling costs, gardening, insurance, gas safety checks, hot tub maintenance and fire safety equipment amongst many others. 

You can also claim reasonable wages paid to family members if they work in the business. You cannot claim for property alterations and improvements, private items or the capital element of your mortgage repayment.

Special rules relating to Furnished Holiday Lets

To qualify as a Furnished Holiday Let (FHL) the property must be available to let for at least 210 days a year, be actually let for 105 days a year and the property cannot be let to the same person for more than 31 consecutive days. If you meet the criteria to be an FHL, HMRC will allow you additional tax benefits, some of which are over and above those afforded to long-term residential landlords.

a) You may be able to claim capital allowances on any embedded fixtures on the property purchase. This can often be in excess of 20% of the cost of the property (so for example if the property cost £600k, you might be able to get a tax deduction in year one against your rents of £120k).

b) You can claim capital allowance on purchasing the carpets, sofas, beds, most furniture, TVs, hot tubs etc. (and provided the total spend in a year is less than the current £1m, you get a full deduction against your rents).

c) You can claim capital allowances on the business percentage on the purchase of a car or van.

d) If you sell the property after at least two years of trading, the Capital Gains Tax you pay on any gain up to £1m could be as low as 10%, whereas a long-term rental property could attract a higher rate of 28%.

e) The net income qualifies as earnings for pension contributions (unlike long-term lets).

f ) There is no tax relief restriction for loan interest to buy or improve FHL, so you claim 100% of the interest at your highest tax rate. Contrast this with the restrictions in the tax relief for buy-to-let residential landlords, who since April 2020 can only get basic rate tax relief; buy-to-let landlords in higher tax brackets could then end up paying much more tax than before, potentially at a higher rate than FHL owners.

g) As an FHL is treated as a business for tax purposes, it is possible to have different trading partners from the owners (so for example, a property could be owned by Mr A, but the trading and taxable people are Mr A, Mrs A & Miss A. This flexibility may allow more tax planning opportunities than a buy-to-let situation).

h) The business will need to register for VAT if the gross rentals for a year exceed £85k. You should seek advice on this topic.

Business rates for holiday lets

As the holiday let is a business, your local council will charge you non-domestic rates (or business rates). Whilst that might appear to be an issue, if you only have one property, and its rateable value is below £12k, you should not actually pay as you will qualify for small business rate relief. For properties with a rateable value of between £12,001 to £15,000, the rate of relief will go down gradually from 100% to 0%. If you own more than one property, you need to consider this carefully and seek advice. You will, however, have to pay to have your rubbish collected.

It should be noted the qualifying days for business rates are different from those used by the HMRC, and they differ depending on where your property is located. In England, from 1st April 2023, and in Scotland, the property must be available to let for short periods for at least 140 days in total over the current and previous tax years and be actually let for 70 days in the last 12 months. Whereas in Wales, the property must be available to let for at least 252 days in total over the current and previous tax years and be actually let for 182 days in the last 12 months.

If you don’t meet these rules, your property will become liable for council tax with little or no relief.

Furnished Holiday Lets and VAT

As the holiday let is a business, you will have to register for VAT if the gross rents in a year exceed £85k. If this is likely, again seek professional advice.

Who should own the holiday let? 

This is a big topic and the answer is to seek professional advice before you buy as it depends on everyone’s own circumstances. 

The main options are sole trader, partnership, LLP or limited company. 

As the purchase is probably the biggest single expense in running an FHL, it is vital to get it right as it affects every single tax, stamp duty, income tax, corporation tax, capital gains tax, business rates, VAT and even inheritance tax. It also affects the potentially significant embedded capital allowances claim mentioned earlier.

If you are interested in the differences between buying a holiday let through a limited company versus buying in your personal name, please read our additional blog by clicking below:

Limited company or sole trader

How to finance a purchase of a holiday let

Whilst most costs associated with raising finance are allowable, if the purchase is structured correctly, there may be ways to obtain tax relief on interest payments that were previously treated as non-allowable domestic mortgages on your private house.

Are you thinking of purchasing a holiday let?

Click below to browse our collection of holiday homes for sale.

Browse our holiday homes for sale

*This article was supplied by R.T. Marke & Co Limited, and holidaycottages.co.uk cannot accept any liability for the content. It is published for information only and offers no advice. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.