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

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Rental statement

The profit from a holiday let is calculated in the same way as other commercial buildings, that is 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 be half on 31st January and half on 31st July in the following year (so for the year ending 5/4/19 you would pay half the tax on 31/1/20 and half on 31/7/20).

Allowable expenses

Expenses that you can claim 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, insurances, gas safety checks, hot tub maintenance, 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 property alterations and improvements, private items or the capital element of your mortgage repayment.

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Special rules

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 a FHL, the tax office allow 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, TV’s, hot tubs etc (and provided the total spend in a year is less than £200k, you get full deduction against your rents).
  3. You can claim capital allowances on the business percentage on the purchase of a car or van.
  4. If you sell the property after at least one year 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 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 after 2020 will 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.

Business rates

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 pay 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.

VAT

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

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Who should own the property?

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 a FHL so it is vital to get it right, as it effects 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.

 

How to finance a purchase

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.


* 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 The Travel Chapter cannot accept any liability for the content.

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