Paying tax on furnished holiday lets: the definitive guide09 August 2019
Letting out a holiday home can be a very profitable venture. Not only do you get a holiday home that pays for itself in rent, but you also get a furnished holiday home that you and your family can enjoy for a week or two during the summer holidays.
With that, holiday homes can be even more profitable when you take advantage of special tax statuses.
“No council tax? No stamp duty? Claim back property furnishings on capital allowances?” - Is it really all possible?
Here, we detail the most profitable tax status - ‘Furnished Holiday Let’, the advantages and disadvantages of ‘Furnished Holiday Let’ tax status and how you can qualify to be a ‘Furnished Holiday Let’.
What is a furnished holiday let?
A furnished holiday let is a type of rental property classification that allows you to take advantage of favourable tax rates if you let out a holiday home for at least 105 days a year. Straddling the taxation line between ordinary rental property and a business, the furnished holiday let tax was created to encourage investment and rejuvenation in Britain’s holiday destinations.
There are strict requirements a property needs to adhere to if you wish to qualify as a furnished holiday let.
How to qualify to be a furnished holiday let?
If you plan to take advantage of the highly profitable tax status of a furnished holiday let, then you will need to meet a range of specific requirements.
Your property must be in the UK or the European Economic Area (EEA)
It seems pretty obvious, but to take advantage of the furnished holiday let status, then your holiday home will need to be located within the UK or the European Economic Area. This may be subject to change depending on the impact of Brexit.
Your property must be fully furnished
Again, it seems pretty obvious, but your property must be fully furnished and your visitors must be entitled to use the furniture. The rules do not specify the extent to which your property must be furnished, but we encourage you to furnish it to a level that would be acceptable for regular renting occupation.
Your property must be commercially let
If you apply to be a furnished holiday let, you must intend to make a profit. The word to pay attention to here is ‘intend’. You don’t need to make a profit. You just need to show that you intend to make a profit. A business plan, working with a professional letting company and marketing collateral can be used to show that you intend to make a profit.
Your property must be available to let for a set number of days per year
To qualify the property must be available to:
Let for at least 210 days of the year (30 weeks)
Rent out on a commercial basis for at least 105 days a year (15 weeks)
Please do not count:
Longer-term lets of more than 31 days Any days when you let the property to friends or relatives at no cost or reduced rates, as this is not a commercial let
It is worth remembering that for the first year your property will be under probation. It is important that you are meeting the following criteria, even if you fail to make a great/any profit.
Your property must be strictly available to let to tourists and holidaymakers
In order to qualify for a furnished holiday let status, your holiday home should only be available to tourists and holidaymakers.
The definition and clarity of this rule is deliberately vague. We think there are two possible interpretations:
- Don’t let the property to family and friends
- Don’t let the property to local residents/business
In our opinion, we think the latter is the more accurate interpretation. As long as you are charging a full, non-discounted letting price to family and friends, then they can be legally titled holidaymakers for tax purposes.
Your property must be let on a short-term basis
To continue being classified as a furnished holiday let all year round, you must not let the property out for longer than 31 days to one individual or group.
There are some exceptions but, again, in the first year, it’s better to err on the side of caution.
What are the tax advantages of a furnished holiday let?
Take advantage of government allowances
If you let properties that qualify as FHLs:
You can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, Relief for Gifts of Business Assets and Relief for Loans to Traders)
You are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
The profits count as earnings for pension purposes
In order to qualify the property as a furnished holiday let, you must be available to let for at least 210 days a year and rented on a commercial basis for at least 105 days a year.
Pay no stamp duty
Holiday homes (static caravans) are almost always exempt from SDLT law. This exemption is just one of the many reasons why so many people choose to not only purchase a park home, in which to enjoy holidays and vacation time, but to live permanently.
Pay no council tax
If you qualify as a furnished holiday let for tax purposes, then you need to register for business rates. Your local council will calculate business rates. Due to the general location of holiday homes, your business rates will almost always be cheaper than council tax.
Claim any profit/loss against income tax
The profit you take from your holiday home will be taxed as income. You will continue to pay your current income tax rate unless the profit from the holiday home takes you over the threshold.
Keep in mind that you will be able to deduct holiday home expenses from your income tax. Expenses which you can deduct include: refurbishment costs, insurance, utilities, mortgage interest and even travel to the property.
Any losses can be carried forward to the next tax year.
Pay a flat rate on capital gains tax
If you decide to sell your holiday home, you will be liable to pay capital gains tax. Fortunately, furnished holiday lets are classified as a business. This will make you exempt from paying any tax on the first £11,000 and a flat rate of 10% on the rest.
Share the profit between partners
If you’re buying the holiday home with a partner, furnished holiday let status allows you to split the profits flexibly between you both for tax purposes. For example, if the profit pushes you into the higher income tax threshold, you can give a greater proportion of profit to your partner.
Claim back property furnishings on capital allowances
If you fancy decking out your holiday home to a luxury standard, then you can deduct this cost from your pre-tax profits. A luxury holiday home standard for British holidaymakers, extra profit for you. Simple.
Claim tax relief on expenses
If you let properties that qualify as a furnished holiday let, then you will be able to claim tax relief on the following expenses. Again, these are subject to change and we will try to update this list as frequently as possible.
Accounting Fees - you are entitled to tax relief on accountant fees that have been paid towards the preparation of your holiday home business accounts
Advertising - if you’re printing brochures, advertising in local papers or sending direct mail, you can claim this back as tax relief
Insurance - if you have insured the property, you will be able to claim this back against tax. Make sure you keep all of your insurance paperwork handy.
Interest - if you have used a mortgage or loan to purchase the holiday home, then you can claim the interest of repayments back against your tax
Heating and Lighting - any fuel, gas or electricity relating to the holiday let can be claimed back against tax. Do not try to claim gas, electricity or fuel that has not been used exclusively by holidaymakers and tourists. General Repair - if you’re keeping the holiday home in good shape, then no doubt this will involve a few repairs. Nearly all general repair costs can be claimed back against tax. Think about painting and decorating costs. Cleaning and Gardening - if you hire a cleaner or gardener to care for your property, you can claim the cost back against tax
Garden - if you want to make a perfect impression upon guests, then you will want to take extra care of your garden and outside areas. If you stock with plants or build a play area, you can claim this cost back against tax. General costs - Think cutlery, bed linen, towels. These are the items your guests will expect to be replaced before every visit. This places an extra burden of cost on your shoulders that can be claimed back against tax.
Please keep in mind the two golden rules when claiming expenses back against your furnished holiday let.
Rule 1 - You can only claim for commercial expenses. For example, if you use the property for two weeks in the summer, you cannot claim back the cost of cleaning the property or replacing the bed linen.
Rule 2 - You must not claim back the initial invested capital. So you cannot claim back the cost of constructing the home or the property conversion.
What are the tax disadvantages of a furnished holiday let?
Be aware of the VAT threshold
If you start to build out a holiday home portfolio, and you start to make a serious profit, then you may need to become VAT registered.
Quick notepad maths suggests that you only exceed the VAT threshold (£85,000) if you let your property for over £1634 per week for a full year. As you can imagine, pretty unrealistic for a single holiday home.
Can a Willerby holiday home be classified as a furnished holiday let?
Yes, a Willerby holiday Home can be classified as a furnished holiday let under current tax law. This is great news for anyone with little start-up capital. Removing the need to take out a massive mortgage for a £600,000 home in the Lake District, you can now start your furnished holiday let adventure for as little as £25,000.