Furnished holiday let ownership and tax considerations

Furnished holiday let ownership and tax considerations

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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.*
Couple studying their taxes


Rental statement for holiday lets 

The profit from a holiday let is calculated in the same way as other commercial buildings, meaning you pay income tax on the rents less a deduction for allowable expenses. This rental statement is normally prepared for the year to 5th April, and the tax payment would generally comprise half on 31st January and half on 31st July of the following year (so for the year ending 05/04/21 you would pay half of the tax on 31/01/22 and the remaining half on 31/07/22).

Rental statement


Tax-deductible allowable expenses 

The nature of holiday lets often means that there is more risk involved for the owner. For example, they may be empty for some of the year, meaning less income when compared to residential lets. Also, more marketing is required to attract a higher number of different occupants, plus there's increased cleaning, wear and tear, and furnishings to take care of. This is presumably why holiday lets receive more tax relief than properties owned by residential landlords.

Expenses that you can claim include: 

  • repairs
  • mortgage interest
  • cleaning
  • laundry
  • heat, light and power
  • broadband
  • water and business rates
  • letting commission
  • welcome packs
  • replacement furnishings and furniture
  • capital allowances on furniture and fixtures
  • travelling costs
  • motor expenses
  • gardening
  • insurances
  • gas safety checks
  • hot tub maintenance
  • fire safety equipment 
  • rates (make sure you claim Small Business Rates Relief if eligible)

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

Calculating allowable expenses


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 30 weeks a year and actually be let for 15 weeks a year. Also, the property cannot be let to the same person for more than 31 consecutive days.

If you meet the criteria to be an FHL, the tax office allows you additional tax benefits, some of which are over and above those afforded to long-term residential landlords.

1. 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 house cost £400k you might be able to get a tax deduction in year one against your rents of £80k).

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

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

Claiming for carpets, beds and wardrobes

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

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

6. There is no tax relief restriction for loan interest to buy or improve an 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 2020 have only received 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.

Your holiday home


Business rates for holiday lets

As the holiday let is a business, your local council will charge you non-domestic rates (known as business rates). Whilst that might appear to be an issue at first glance, if you only have one property and its rateable value is below £12k, you should not pay this as you will qualify for small business rate exemption. If you own more than one property, you need to consider this carefully and seek some advice.

A holiday let


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.

House


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 individual 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 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

Partnering up


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.

Choosing a property


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 material 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.

This article was supplied by R.T. Marke & Co Limited and holidaycottages.co.uk cannot accept any liability for the content.



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