Key facts about tax for furnished holiday lettings owners
The ongoing British “staycation boom” is welcome news for furnished holiday lettings (FHL) property owners throughout the UK. Although international travel restrictions brought by the COVID-19 pandemic have been a key driver in 2021, the UK furnished holiday lettings market has shown strong, growing demand for years. That is expected to continue.
The UK furnished holiday lettings market continues to attract many investors. Some are buying furnished holiday lettings for the first-time, to generate additional income now and/or in their retirement. Experts consider furnished holiday lettings to be a good investment. You may be considering investing in a furnished holiday lettings property of your own, so, what key tax facts should you know?
What qualifies as a furnished holiday let?
Properties that qualify for tax purposes as furnished holiday lettings are subject to separate tax rules. To be considered a furnished holiday let, from a UK tax perspective, the property can be in the UK or the European Economic Area (ie EU countries plus Iceland, Liechtenstein and Norway). And, as the name suggests, the property must contain sufficient furniture that visitors can use while staying in the property.
You must let out the property commercially with the intention of making a profit. If you build up a portfolio of furnished holiday let properties in the UK, they will be taxed as one. Properties within an EEA country will be taxed as one within that country – entirely separate to any UK furnished holiday lets in your portfolio.
Strict “occupancy conditions” apply. For a new let, they apply to the first 12 months after you start letting the property. Thereafter, they apply to the tax year (6 April to 5 April the following year). If you stop letting the property, conditions apply for 12 months up to the date you stopped letting.
Three occupancy conditions
Each property must satisfy three occupancy conditions:
- If you let out the property for 31 continuous days or more and total lettings are more than 155 days, the property will not be deemed a furnished holiday let for that year. It will be subject to different tax rules.
- The property must be available for letting as a furnished holiday let for at least 210 days in the year. Any days you spend staying at the property cannot be counted as part of this total.
- Your property must be let to the public commercially as furnished holiday accommodation for at least 105 days in the year. Lets to friends and family do not count, neither do longer-term single lets of more than 31 days, unless circumstances are exceptional (eg a guest cannot vacate because of illness or injury).
- Visit government website Gov.uk for more on occupancy conditions.
Furnished holiday lettings allowable expenses
You can claim a range of allowable expenses that you can offset against income earned from your furnished holidays lettings property. Allowable expenses include:
- mortgage interest
- insurance (eg public liability, buildings and contents)
- maintenance and cleaning costs
- utility bills
- refuse collection
- lettings agency fees
- cleaning products
- welcome packs
- advertising, stationery, related business calls
- accountancy fees.
You should record all allowable expense costs, as it will make life easier when completing your Self-Assessment tax return. To be allowable, expenses must result purely from commercial lettings – not from use by you, your friends or family. You must calculate and deduct all private-use expenses before claiming allowable expenses for commercial lettings.
If your furnished holiday let is closed for part of the year because you have no bookings, you can still deduct some expenses (eg mortgage interest) for the whole year, as long as you don’t live in the property during the period. If you let part of your property as a furnished holiday let or use the property privately for part of the year, you must apportion costs accordingly.
More good reasons to invest in FHL
- You can claim Capital Gains Tax trader reliefs (eg Business Asset Rollover Relief, Entrepreneurs’ Relief, etc).
- You can also claim Capital Allowances for furniture, equipment and fixtures, so these are paid for out of income, not your own pocket.
- Profit generated from FHL count as earnings for pension purposes, which can later increase your pension payments.
- You can split your FHL profit between yourself and your partner/spouse in whatever way you like, which can reduce tax liability.
- As self-catering accommodation, business rates are payable on furnished holiday lettings. However, if you let just one property and its rateable value is below £15,000, you may be able to claim Small Business Rate Relief (up to 100% in some areas).
Need to know! If income generated from furnished holiday lettings exceeds £85,000 a year, you must register for VAT, charge standard VAT to paying guests and pay it to HMRC after completing your VAT returns.
What if your furniture holiday letting makes a loss?
If your UK or EEA furnished holiday let makes a loss, you can offset it against profits for future years. However, if you have a mixed portfolio of UK and EEA lettings, you must maintain separate financial records for each and the losses of UK properties cannot be offset against profit on EEA properties (or vice versa).
Need to know! If you already have a mortgage on a property you are considering offering as a furnished holiday let, check first with your mortgage provider or an independent mortgage adviser. You may need to take out a different mortgage.
- Visit government website Gov.uk for more guidance on the tax implications of owning a furnished holiday lettings property.
- There really is no substitute for tailored tax advice from an experienced accountant when it comes to furnished holiday lettings and tax. If you’re investing in property overseas, find a qualified local tax expert.
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