Last updated on the 15th March, 2023
Tax, for most people, can be confusing at the best of times, but when you are considering whether or not to enter the world of Furnished Holiday Lettings (FHL) there are things to consider that you may not even be aware of.
You may already own a holiday cottage or you might be looking for a property to rent out to tourists and holidaymakers. As the leading holiday letting agent for this area we can support you in your holiday letting journey. We cover holidays lettings in across the UK. If you have any questions, please call our office on 01326 555 555.
Property rental businesses are not normally treated as a trade but as an investment activity. Furnished Holiday Lettings occupy a special niche in the tax world and therefore benefit from certain benefits and allowances normally only available to normal trading businesses.
What is a Furnished Holiday Let?
This applies to 'self-catering' accommodation, be it a house, flat, caravan, yurt, etc. As long as it meets specific conditions:
1) Accommodation must be located within the European Economic Area (EEA).
2) Accommodation must be let on a commercial basis and with a view to making a profit.
This may be difficult to prove but a business plan, profit and loss or cash-flow projection, will help to satisfy this requirement. The plans and figures must show that you expect to make a profit. Whilst losses may be seen in the early years of a new venture this is not fatal to a claim for FHL treatment - provided it can be shown that profits are likely in subsequent years.
3) Accommodation must be furnished.
Sounds obvious but the rules do not specify how much furniture is actually required – usually beds, seating, a table, cooking and washing facilities and possibly some storage; all suitable for the size and type of accommodation, would be the minimum expected.
4) Accommodation must meet the occupation requirement.
What is the Occupation Requirement?
During a 12 month 'review' period, which is most commonly the tax year (although different periods may apply at start and end of the letting business), the accommodation must:
1) Be available for commercial holiday letting to the public for at least 210 days (30 weeks).
2) Be actually let commercially as holiday accommodation to the public for at least 105 days (15 weeks).
3) If occupied by the same person for more than 31 days, have a total of no more than 155 days of such ‘longer term' occupation.
Important things to know about the Occupation Requirement - If more than one FHL property is operated, e.g. a complex, the occupancy can be calculated as an average of the day totals for all of the letting properties, so that if one property just fails to meet the conditions it may be ‘buoyed-up’ by other properties that do reach the total. Also, it may be difficult to meet the occupation condition every year but once a property has acquired FHL status it will retain this status even if it fails to meet the actual occupation condition for two consecutive tax years – it will only cease to be a FHL if it fails the test for three consecutive years. In effect, a property must meet the occupation condition once every three tax years – at a minimum – to continue to be eligible for FHL treatment.
What are the tax benefits for Furnished Holiday Lettings?
1) Capital Allowances are available on fixtures and integral features within a FHL property and on other capital expenditure incurred for a FHL business.
This includes expenditure on furniture, fixtures and fittings, and equipment, (Normal letting businesses are unable to claim Capital Allowances on this sort of expenditure.) At the time of writing the first £1M of capital expenditure incurred can qualify for 100% Annual Investment Allowance (AIA). Detailed rules apply to Capital Allowances, further information can be found here.
2) Capital Gains Tax reliefs, normally only available to trading ventures, can be claimed if a FHL property is sold. These include:
• Entrepreneurs’ Relief – allows a taxable gain deriving from qualifying property to be charged at the reduced rate of CGT of 10%. (Gains not eligible to Entrepreneurs’ Relief are subject to a higher CGT rate depending on the level of an individual’s income and the size of the gain (with a lifetime limit of £1 million). Find out more here.
• Roll-over relief – allows specific chargeable gains to be deferred if new trading assets are acquired. Gains on the sale of FHLs can be deferred using this relief and the acquisition of a FHL property can count as a new trading asset allowing gains on other assets to be deferred. There are more details on the government website here.
• Hold-over relief – if a property is given as a gift, the resulting capital gain can be frozen and will only be liable to capital gains tax when the recipient sells. Find out more about hold-over relief here.
Please note that capital allowances will not apply to the cost of the actual property itself, or the land it is built on. Please also be aware it may be difficult to claim Entrepreneurs' Relief on the sale of a single FHL property when the owner also continues to operate other furnished holiday letting properties. General information on Capital Gains Tax van be found on the .gov.uk website.
3) Proportion of profits - If a FHL business is operated by a husband and wife partnership the profits can be allocated in any proportion required – irrespective of their actual shares in the ownership of the FHL property (For an ordinary property letting business the profit shares must be divided according to the actual property ownership shares, in the absence of evidence of the ownership shares the profits are divided equally).
4) Pension savings - The profits you make from running a FHL business are classified as ‘relevant earnings’ which means that you can make bigger contributions to your pension – known as ‘tax advantaged pension savings’ (Ordinary letting business profits do not qualify for this).
Other Issues
Losses - You cannot offset a loss incurred by your FHL business in any year against any other type of income or gain. You can, however, carry any loss forward and offset it against any eventual FHL profit in future years.
Inheritance Tax (IHT) - There is no special treatment for FHL property under IHT. The market value of any FHL property (net of mortgages) will normally fall within an individual’s estate for IHT purposes and will be subject to IHT in full (In order for an FHL to qualify for Business Property Relief it must first be shown that the operation of the FHL amounts to a 'proper business'. Principally, this requires a high level of services to be demonstrated to HMRC e.g. such as when operating a B&B).
Value Added Tax (VAT) - Please see our blog on VAT for more detail.
Business Rates - To be eligible for business rates, from 1 April 2023 a property must be available for letting commercially for short periods that total 140 days (20 weeks) or more in the previous and current year; and actually let commercially for 70 days (10 weeks) or more in the previous 12 months. The government provide more information on Business Rates on their website.
What expenses can be claimed?
The rules for calculating taxable business profits are applied when working out the profit or loss on a FHL business. The two most important general rules are:
1. To be allowable as a deduction, an expense must be incurred ‘wholly and exclusively’ for the purposes of the FHL business.
2. To be allowable as a deduction an expense must not be ‘capital’ in nature. Capital expenses are usually one-off expenses incurred on the original purchase or construction of a property or on its improvement. Some capital expenditure on plant and other equipment may well qualify for ‘Capital Allowances’ (see above). Capital expenses should be recorded and invoices etc. kept because such costs will usually be allowed against any gains liable to CGT that might arise on the sale of the FHL property.
More specifically, allowable expenditure will include:
• Management or agency fees for letting.
• Advertising (including website maintenance) to attract guests.
• Membership of relevant trade associations.
• Maintenance and cleaning.
• Insurance relating to the FHL business (e.g. buildings, contents, public liability, employee liability).
• Accountant’s and other on-going, non-capital professional fees.
• Interest on loans to acquire or improve an FHL property – note: the capital repayment element is not allowable as a deduction.
• Rates, water rates, refuse collection costs and other similar charges.
• Repairs and renewals to either the property or equipment used in the FHL business.
Non-resident owners - Where an owner is not resident in the UK then the obligations of the Non-Resident Landlord Scheme (NRLS) still apply to a FHL just as they do to other property income.
More information on the Non-Resident Landlord Scheme can be found here.
Tax Returns – If you receive income from a FHL business then you will be required to report this to HMRC through Self Assessment, they have notes and a help sheet to get you started.
Talk to a qualified accountant
You’re probably already aware that tax rules change – for instance, you can no longer offset any losses against other income, but you can offset losses against future holiday let income. That’s why it’s always best to get some solid advice from a professional.
For more on the tax benefits and allowances you can expect for your own holiday let business, and to get a better idea of your potential profits, we always recommend seeking out a qualified, professional accountant who will be able to advise you further.
