Furnished Holiday Lettings

What are furnished holiday lettings?

A Furnished Holiday Let is a specific category of rental property classification in the UK, Ireland, and other European countries. If your property is a Furnished Holiday Let, it allows you certain tax advantages and benefits as an owner. But how does your holiday home receive this status? To be given a Furnished Holiday Let status, you will need to meet certain conditions.

What are the advantages of a Furnished Holiday Let?

Holiday Let Tax Deductible Expenses

Capital allowances can be claimed on your FHL property. This means the cost of kitting out your cottage to a luxury standard (and, in return, increasing your potential rental income) can be deducted from your pre-tax profits. This isn’t an option available for long-term rental properties.

Make tax-advantaged pension contributions.

Income generated from an FHL property is classed as ‘relevant earnings’, which means you can make tax-advantaged pension contributions.

When you sell your property

If you should come to sell your FHL property, you can claim certain Capital Gains Tax (CGT) reliefs. These are unavailable to long-term rental properties and include:

  • Entrepreneur’s Relief
  • Business Asset Rollover Relief
  • Gift Hold-over Relief

Split the profits between your husband/wife

The 50/50 rule does not apply to income arising from a UK property business that consists of, or so far as it includes, the commercial letting of furnished holiday accommodation.

  1. If a spouse or civil partner carries on the activity alone: that spouse or civil partner is taxable on the income.
  2. If a spouse or civil partner carries on the activity with others: the income is split for tax purposes in the way the parties have agreed to split the profits amongst themselves.

Council Tax for Holiday Lets

Self-catering accommodation in England, which is available for short-term lettings for more than 140 days in any given year, is subject to Business Rates property tax.

Since all FHL properties must be available to let for a minimum of 210 days, they fall into this category. However, this isn’t necessarily bad news, as you can claim Small Business Rate Relief, which can be up 100% depending on what area you are in. in this case, you would not need to pay council tax.

If you have self-catering accommodation in Wales, you are eligible to claim Small Business Rates relief if the property is available for letting for up to 140 days per year and is let out for 70 days of the year.

If you own self-catering accommodation in Scotland, you may also need to pay business rates. You are advised to contact your local authorities to confirm your eligibility for Business Rates relief, as this is handled differently than in England.

What are the disadvantages of a Furnished Holiday Let?

VAT

As part of the 2021 budget announcement from Rishi Sunak, it was announced that a new rate of VAT at 12.5% will run from October 1st, 2021, until March 31st 2022, for the tourism and hospitality sector.

If your FHL property portfolio turnover exceeds the VAT threshold, you must become VAT registered. If you own an individual FHL property, to exceed the current VAT threshold, you will need to let your property for over £1,635pw for the entire year (52 back-to-back bookings), equating to £85,000 in total per year. Be sure to do the maths, but you’ll most likely need multiple FHL properties before VAT becomes something you need to consider.

If your income generated from guests exceeds £85,000 per year, you must register for VAT and pay the standard rates. This requires you to pay 20% (or the temporarily reduced VAT rates) above the fee you charge for guests to stay.

Losses cannot be offset against other taxable income

If you make a loss in your UK Furnished Holiday Letting business, it can only be carried forward against a profit of the same UK Furnished Holiday Letting business.  Likewise, a loss in an EEA Furnished Holiday Letting business can only be carried forward against the profits of the same EEA Furnished Holiday Letting business.

Business rates

The criteria that decide whether or not you must pay business rates for Furnished Holiday Lets changes depending on which country the property is in.

Although owners of multiple holiday lets may be disadvantaged by business rates in some cases, business rates for holiday lets could be advantageous to you. If you let just one property and its rateable value falls below £15,000, then you could be eligible for Small Business Rate Relief.

What are Furnished Holiday Lettings allowable expenses?

Your FHL property is treated similarly to a business regarding expenses. This allows you to offset expenses against your revenue. Two crucial points are:

  1. Expenses claimed must be against commercial use only. If your family or friends use your property, your expense will be partly considered ‘private use’. This means you will need to calculate what percentage of the expense is commercial. For example, if you use the property privately for three months of the year, 75% of your expenses will be considered commercial.
  2. Expenses must not be capital. For example, one-off payments for the purchase or construction of the property or for its fixtures (capital allowances could cover these expenses).

Here are some examples of allowable expenses:

  • Utility bills or refuse collection
  • Interest on loans associated with the property
  • Advertising or letting agency fees
  • Products bought for the property (cleaning products and welcome packs)
  • Maintenance and cleaning costs
  • Insurance relevant to your FHL (e.g. public liability, buildings and contents insurance)

Furnished Holiday Let Capital allowances

Capital allowances are tax relief that you can benefit from when running a holiday let business. As holiday lets are classed as a business, this allows deducting the cost of certain items that will be used as a part of your business from your pre-tax profits. Holiday let capital allowances can be claimed for things such as furnishings, fittings and equipment that you will use to run your business.

What can I claim capital allowances on?

Capital allowances can be claimed against items purchased to be used as part of a business, under ‘plant and machinery. These items mainly include fixtures and fittings that help your property function as a business for holiday lets.

There are two main categories of items that can be claimed under capital allowances: loose and fixed items. Here are some examples from each:

Loose items (mobile items)

  • Furniture
  • Furnishings (Eg. bed linen, cushions, curtains etc.)
  • White electrical goods (Eg. washing machine, fridge, dishwasher etc.)
  • Electrical appliances (Eg. coffee machine, TV, kettle)

Fixed items (stationery items)

  • Electrical wires
  • Kitchen units
  • Water pipes and plumbing
  • Carpets
  • Repair and replacement required in the property (doors, windows etc.)

How to qualify to be a Furnished Holiday Let

Your property can qualify as a Furnished Holiday let if it meets the following criteria:

Your property must be finished.

Although this may seem a little obvious, it is part of the requirements. The rules do not specify to what extent your property must be furnished. Still, if you aim to provide everything you would expect from a self-catering holiday cottage, then you’ll be on safe ground (don’t forget, some of these expenses can fall under Capital Gains Tax relief).

Be within the UK or European Economic Area (EEA)

To qualify as a furnished holiday let, your property must sit within either the UK or one country that makes up the European Economic Area (EEA), including all European Union Members (EU).

Be available to let

For the first 12 months of being an FHL, your property will effectively be in a ‘probationary’ period. During this time, the potential and actual availability of your property will be reviewed, and for your FHL status to become a more permanent feature, in the first year, your property must:

  • be available to let for 210 days (30 weeks),
  • be let commercially as a holiday property for 105 days (15 weeks)
  • and if occupied for more than 31 days by the same person/people, there must not be more than 155 days of these longer lettings in total across the year

Any days that you, your friends or your family spend on the property, for free or at a discounted rate, do not count towards the total commercial occupation requirements.

While this requirement may seem somewhat strict, there is some reasonable flexibility if you are:

  • Unable to meet the required occupation figuresThese figures can be averaged out across multiple FHL properties – however, properties in the Republic of Ireland are considered separate from the rest of the UK.
  • Unable to meet the actual occupation figure (after your ‘probationary’ period)If you met the occupation requirements during the previous year, a period of grace could be granted (for a maximum of two consecutive years) by the HMRC. This means you will retain your FHL status, providing you meet the occupation requirements in the future.

When does a property stop being a furnished holiday let?

Property no longer qualifies as an FHL if it meets one of the following criteria:

  • The property is sold
  • The property is being used for private occupation
  • The letting conditions are not met, including election averaging and period of grace elections

WIM Accountants are here to help businesses with their accounting and taxation needs.

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