Income from properties that pass the criteria for furnished holiday lettings are subject to taxation based on the rental business calculation methods. If substantial services similar to those of a hotel are offered, it is considered a trade, and is classified as self-employment instead of Furnished Holiday Lettings.
Although Furnished Holiday Lettings are not technically trades, they are taxed as if they were for certain tax matters, giving them tax benefits compared to other rental properties.
Some of these special tax benefits include:
. Full tax relief for mortgage interest payments
- Deductions for furniture, decorations, and similar items.
- Capital Gains Tax exemptions typically reserved for traders.
- The profits are recognized as earnings for pension calculations.
To maintain these special benefits, profits or losses from furnished holiday lettings must be determined annually, ending on 5th April, and should be calculated separately from any other rental income. This ensures that the unique benefits apply only to those properties that fulfill the specified criteria.
What accommodation qualifies as furnished holiday lettings?
To be classified as a furnished holiday letting, the property must be located either in the UK or the European Economic Area (EEA) and must be let for commercial purposes. All properties you possess in the UK are collectively taxed under one Furnished Holiday Letting category, while all those in other EEA regions are considered a separate business entity. It’s essential to maintain distinct records for each of these businesses.
The term ‘commercial’ refers to properties let with the intention of turning a profit. Even if lettings during the off-peak season don’t yield profit, they can still be deemed commercial if they contribute to covering the property’s upkeep costs. In contrast, letting properties to family or friends for free or at very low rates is not considered commercial.
A property is regarded as ‘furnished’ if visitors have access to furniture. The property should offer enough furniture for typical use.
If a property aligns with these conditions, it will then be subject to additional qualifying tests as follows:
How to qualify as a furnished holiday let
For a letting to be classified as a furnished holiday let, it must meet all of the following four criteria:
- The Availability Condition: The property should be open for commercial letting as holiday accommodation to the public for at least 210 days within the tax year. If the property is occupied by the owner at any point during the year, that period cannot count towards the 210 days. However, an owner is allowed to live in the property outside of the holiday season and vacate during the holiday season to let it out.
- The Letting Condition: Within the tax year, the property should be commercially let as holiday accommodation to the public for a minimum of 105 days. If an individual owns more than one FHL, an averaging election can be applied. Additionally, a period of grace election can be considered if this criterion isn’t consistently met annually.
- The Pattern of Occupation Condition: The property should not be rented out for extended stays (usually 31 days or longer) for over 155 days within the tax year.
- The property needs to be furnished.
Each of these conditions ensures the property adheres to the specific requirements of a furnished holiday let.
Property closed for part of the year or only part of the property let
If a property is exclusively maintained for use as furnished holiday accommodation but remains unoccupied for a portion of the year due to lack of bookings, you can still deduct all associated expenses like insurance, interest, and so forth, as long as the property isn’t used for private purposes.
For properties where only a section is rented out as furnished holiday accommodation, both income and expenses should be divided reasonably. A similar division should be applied when selling the property for the purpose of Capital Gains Tax (CGT) reliefs.
Special treatment for furnished holiday lettings
Mortgage Interest
Unlike a standard buy to let, mortgage interest on a FHL is still fully allowable and thereby offers a distinct advantage.
Capital allowances
Businesses related to Furnished Holiday Lettings can claim capital allowances on items such as furniture and appliances within the property. However, businesses not categorized as Furnished Holiday Lettings are not eligible for these capital allowances. If an asset is used privately, a suitable correction should be applied.
It’s important to note that capital allowances cannot be claimed on the actual cost of the property or the land it occupies.
Capital Gains Tax
If a property is recognized as a Furnished Holiday Letting, the following reliefs may be accessible:
- Relief for Business Asset Disposal
- Rollover Relief for Business Assets
- Relief for gifts and comparable transfers.
Pensions relief
Profits from Furnished Holiday Lettings are considered pertinent UK earnings for pension contributions. You can contribute to your pension (this includes contributions from employers) up to the lesser of the total relevant earnings or £40,000.
However, if the income surpasses £200,000 or if pension benefits have previously been accessed, there might be additional limitations on the amount you can contribute. Provisions exist to utilize unspent allowances from prior years.
Inheritance Tax
In a recent legal case (HMRC v Nicolette Vivian Pawson), the taxpayer was unsuccessful in claiming Business Property Relief on a regular holiday rental. To qualify for Business Property Relief, there must be an offering of additional services, making it resemble hotel services rather than a simple furnished holiday rental. Without this qualification, the property’s value will be factored into the estate for Inheritance Tax calculations.
VAT
When a VAT-registered trader provides holiday accommodation, it’s typically subject to the standard VAT rate*, irrespective of whether the accommodation satisfies the criteria for Furnished Holiday Letting. However, there might be exceptions for off-season rentals.
Since most guests won’t be eligible to get a VAT refund, it’s often not beneficial to register for VAT unless it becomes mandatory due to a turnover exceeding £85,000 within a 12-month span.
*Note: In response to the Covid-19 pandemic, there was a special VAT reduced rate. Supplies made between 15th July 2020 and 30th September 2021 had a 5% rate, and those made between 1st October 2021 and 31st March 2022 had a 12.5% rate. After this, the rate returned to the standard 20%.
Class 4 National Insurance contributions
Since the profit is taxable as rental income Class 4 National Insurance is not payable.
Losses
Losses from your UK Furnished Holiday Letting venture can only be offset against future profits from that specific UK Furnished Holiday Letting operation. Similarly, losses from an EEA Furnished Holiday Letting enterprise can only be offset against future gains from that exact EEA Furnished Holiday Letting operation.
What happens when a property stops being a Furnished Holiday Letting?
Revenue and expenses from a property that fails to maintain its Furnished Holiday Letting status transition into either UK or non-UK property income. This will be combined with other income from properties not classified as Furnished Holiday Lettings. Typically, any incurred losses would become void, but exceptions exist for temporary interruptions.
DISCLAIMER
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice that takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi, and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.