With the rising popularity of short-term letting platforms, including Airbnb, and the impact of Brexit and the COVID-19 pandemic on our travelling habits, we will undoubtedly see a high demand for holiday lets and ‘staycations’ in the coming years.
The question is: How can potential property investors make the most of this opportunity?
Furnished Holiday Let Tax Planning can save you significant amounts of tax every year. Holiday lets allow higher rate taxpayers to deduct the full mortgage interest off profits. Also, entrepreneurs’ relief means you only pay 10% CGT if you sell the property instead of 18% or 28%.
Buying a Furnished Holiday Let (FHL) could be one approach. This is a specific kind of rental property classification found in the UK and Ireland, along with other European countries.
What is a Furnished Holiday Let?
A furnished holiday let refers to a tenancy for a fully furnished property that can only be occupied by any one tenant for a limited period. The terms and restrictions may vary depending on mortgage lenders, but there are a few strict requirements provided by the furnished holiday letting tax legislation.
However, on the whole, the potential tax advantages associated with these properties are considerably more attractive for holiday home buyers and holiday let investors. Many investors like the idea of Furnished Holiday Lets (FHLs) because they can have higher potential rental income than normal buy-to-lets.
The furnished holiday let rules and criteria:
- The property only qualifies if it is let on a commercial basis.
- The property must be available for letting for at least 210 days a year and actually be let for 105 days a year. However, the property shouldn’t be rented out to the same person long-term (more than 31 days). Sidenote: This refers to public rentals, so family and friends don’t count…
- If the property is rented out to one individual for over 31 days, there is a limit of 22 weeks each year for this type of long-term occupation.
What are the furnished holiday let capital allowances?
Capital allowances are one of the major benefits of holiday lets. You can claim all capital items, such as any fixtures and fittings, furniture, and any other equipment off your profits (up to £1m per year, until March 2023).
This is a major benefit over a traditional buy-to-let as here you can’t claim anything upon purchase, but instead, it’s all worked out when you sell the property as part of the capital gains tax calculation.
Are there allowable expenses for holiday lets?
Furnished holiday lets allow for more allowable expenses than a standard buy to let. Holiday lets are considered a business rather than property so really any expenses related to the properties are allowable, whereas with normal buy-to-lets there are slightly more restrictions.
What are the tax implications of furnished holiday lets?
If properties meet specific criteria, furnished holiday lets can deduce mortgage interest and other financial costs before calculating tax liability.
Essentially, a holiday let is considered to be a business for tax purpose, meaning that owners of holiday lets can actually deduct the cost of their mortgage interest in its entirety, regardless of any other income they might have.
How are furnished holiday lets taxed?
Profits gained from a furnished holiday let can also be shared between multiple owners for tax purposes (spouses, business partners etc.).
Profits are distributed based on the legal ownership ratio, so if you were to own 25% of the property, you would receive 25% of the profits. Better yet, owners are allowed to distribute the profit in whichever way they choose!
What are the tax advantages of furnished holiday lets?
There are significant potential tax benefits to furnished holiday lets:
- The furnished holiday let owners are still entitled to many of the tax advantages buy to let landlords no longer get. Other residential landlords, in comparison, only qualify for basic rate tax relief on loan interest.
- The ability to call for allowable expenses including: Business Property relief (BPR) for inheritance tax goals. Business-related expenses also remain tax-deductible, which means that any property-related investments made – including furniture or decorative changes – entitle the property owner to capital allowances relief. This means that the cost of fitting out your property to a high standard – boosting your prospective future rental income while doing so – is knocked off your pre-tax profits.
- Rental income generated through furnished holiday lets can be invested into personal pensions if considered ‘relevant earnings’.
- If you decide to sell your furnished holiday, let, you will likely be able to claim Business Asset Disposal Relief (entrepreneurs’ relief), giving you a chance to pay 10% on gains up to £1m. This is a significant leap from the higher rates on gains made from typical buy-to-lets.
There are even more Capital Gains tax reliefs available to FHLs, such as Gift Hold-over Relief and Business Asset Rollover Relief, as FHL’s are considered to be business assets as opposed to investments, these reliefs are not available to long-term rental properties.
Note that one misconception is that FHLs can claim business property relief (reducing the inheritance tax burden), but they cannot. Having said this, there are certain cases where you can claim business property relief, though they are very rare.
What are the disadvantages of furnished holiday lets?
The dreaded VAT.
- It’s possible that once you fit into a certain income bracket, you might have to register for VAT and pay the associated rates. However, this only comes into play if your property generates over £85,000 each year.
- If you are already registered for VAT (as an individual or for another of your businesses), your furnished holiday let income could also be liable to VAT. The potential increase in tax payments here may mean that you take a financial hit, so it’s worth being aware of in advance.
- While there are significant advantages to furnished holiday lets, there are higher commercial risks at stake. It’s possible that the properties may be uninhabited for long periods of time, resulting in an inconsistent income. The necessity to provide all furnishings also impacts overall profits.
- Setting these admin and typical business rates aside (though 100% relief may be a possibility depending on the size of the property), furnished holiday lettings can be a much more tax-efficient alternative to traditional buy-to-let scenarios.
Speak to Archimedia Accounts today, for our tax saving services
If you are interested in learning more about investing in furnished holiday lets, it’s advisable to consult with a professional accountant. To chat with us about the tax advantages furnished holiday lets could offer you, please contact us.
Can you offset furnished holiday let losses against other income?
You cannot set off furnished holiday let losses against other income (so you cannot reduce your existing income tax bill), you’d only be able to set the losses against future profits from all your property – here FHLs share the same rule as a normal buy to let.
However, one major advantage of FHLs is if a portion of the loss arises because of Capital Allowances (i.e. assets you claimed off the profits of the FHL – which by the way, would be tax deductible with a normal buy-to-let), you can actually claim these against your other income.
This could be a major tax advantage for some people, especially higher-rate taxpayers who are doing up the property. This tax benefit is so good, a higher rate taxpayer with £130k of employment income could end up saving £40k of tax in 1 year!
Is furnished holiday let income pensionable?
Yes, furnished holiday let income is pensionable. It acts like a business. The normal limits for pension contributions apply and work it works in the same way as if it was a business.
Do I need an accountant for a holiday let?
We would definitely recommend you use an Accountant for your furnished holiday let. As well as ensuring you comply with the law, an Accountant can help you save as much tax as legally possible. A good guide is the Accountant should save you twice as much tax as you’re paying them. A great Accountant could help you save a lot more!
Furnished holiday lets can provide significant tax advantages over traditional buy-to-lets. You could save a lot of tax and potentially make better rent yields. However, there are significant potential tax disadvantages that you may run into depending on your situation.
The biggest potential disadvantage is your VAT, if your situation means you’d need to become VAT registered this may be a serious disadvantage. Read the above article and get in touch with us to find out the best plan for your situation.
You might be interested in property tax accounting services.