When embarking on your holiday-letting journey, knowing how to manage bookings, cleaning, maintenance, and changeovers is an integral part...
Owning and letting out a holiday home can be a very lucrative venture and an excellent source of income. Not only do you have a holiday cottage that you can stay in for a few weeks each year. It can also act as an investment asset which covers its own costs, plus all the extras. Understanding the intricacies and the details of Furnished Holiday Lets tax can be financially rewarding. Allowing owners to benefit from specific tax advantages.
We know that understanding tax on holiday lets can be quite complicated, so we’ve put together a comprehensive guide. This includes all you need to know about Furnished Holiday Let tax. With a detailed breakdown on the advantages and disadvantages of renting out your holiday home.
Use the quick links to read about specific subjects, or continue reading our full Furnished Holiday Let tax guide 2023.
If you would like more expert advice and to find out more about letting your holiday home with Coast & Country Cottages, request a free Owners Guide today:
A Furnished Holiday Let (FHL) is a specific category of short-term rental property classification in the UK, Ireland and other European countries. If your property is a Furnished Holiday Let, it allows you, as an owner certain tax advantages and benefits.
But how does your holiday home receive this status? To qualify as a Furnished Holiday Let you will need to meet certain criteria which include annual bookings, level of furnishings and availability.
Furnished Holiday Lets have a unique standing with taxation, and therefore gain from certain benefits and allowances usually only available to normal trading businesses. A Furnished Holiday Let is classified as a ‘commercial business’ by HMRC and will need to meet the following criteria in order for you to qualify for special tax advantages.
Your holiday let must be actively promoted and let commercially, with the intent of making a profit. Using a holiday letting agency like Coast & Country Cottages is a fantastic way of ensuring you see positive returns on your investment, as we take care of all marketing, administration and bookings.
For more information on the services we offer, take a look at our blog on choosing a holiday home letting agency.
There are three main conditions relating to the occupancy of your holiday let that must be met in order to qualify:
But don’t worry, if you don’t qualify for the occupancy requirements, we’ll explore why later in the article.
It goes without saying that your holiday home needs to be adequately fitted out in order to qualify as a Furnished Holiday Let. There aren’t specifics on what needs to be provided, but furnishing your holiday cottage with the intent of making it a self-catering accommodation should be a good benchmark.
Don’t worry too much about the expenses incurred on furnishing your holiday let , as the great news is that the costs of some of the furniture can be deducted as an allowable expense when looking at relief from Capital Gains Tax. We explore this topic in a bit more depth further on in the blog.
We understand that furnishing a holiday home can be a daunting task, so have a quick look for inspiration on our blog top 10 Devon brands for styling your holiday home.
If your property meets the required criteria, there are favourable tax benefits which will certainly make your venture more profitable, and enable you to create an appealing, marketable holiday home.
Here are just some of the benefits of having a property with Furnished Holiday Let status:
Running a holiday let as a business will naturally mean it will incur operating costs or trading expenses which are integral to the purpose of your business. If your holiday cottage is run as a Furnished Holiday Let, HMRC allow these running costs and expenses to be deducted from your income. Which means that the amount of tax paid on any profit will be lower. But, it’s important to note that these expenses must have been incurred wholly and exclusively for the purpose of running your FHL.
Owners are also entitled to Capital Allowances on items used to increase the potential rental income of their holiday let. This includes items such as furniture, equipment and even the embedded fixtures that you purchase with or install in your property.
Embedded fixtures include items such as water, electrical and heating systems, kitchens, bathrooms, carpets etc. This will significantly reduce or eliminate your holiday letting taxable profits in the first few years. If you have never made a claim, it’s not too late if you still own the property and it qualifies as an FHL.
Claiming capital allowances on embedded fixtures requires the skills of surveyors and capital allowances specialists. For more information, download a guide from Zeal Tax HERE
Take an in depth look on the HMRC website on how to calculate your taxable profits.
Capital Gains Tax (CGT) is charged on the profit made when you sell an asset that’s increased in value. But the good news is, when selling your Furnished Holiday Let, you have the added benefit of being able to claim Capital Gains Tax relief across the following areas:
Business Asset Rollover means you may be able to delay paying Capital Gains Tax if you sell your property and use all or part of your proceeds to buy a new holiday home or invest in certain other qualifying assets.
Business Asset Disposal Relief, (previously known as Entrepreneurs’ Relief) allows you to reduce the Capital Gains Tax (CGT) when you sell a ‘business asset’. The amount of tax you’ll pay will be at the lower rate of 10% on all gains on qualifying assets, rather than the higher rates of 18% and 28% for individuals selling residential property.
You may be able to claim Gift Hold-Over Relief if you give away your holiday home or sell it for less than it’s worth to help the buyer. What this means is you don’t have to pay Capital Gains Tax when you give away your property, and the person you give it to only pays CGT (if any is due) when they sell.
You can make tax-advantaged pension contributions, as income generated from a Furnished Holiday Let is classed as ‘relevant earnings’.
Visit the HMRC HS253 help guide help guide for more information.
If you share the ownership of your Furnished Holiday Let with a partner, you can portion the profit however you decide for tax purposes, regardless of the ownership split.
Visit the HMRC manual for more information.
In England holiday lets that are available to let for 140 or more days and actually let for 70 days in a year will qualify to be rated for Holiday Let Business Rates. Business rates are a tax to help to pay for local services.
Whilst your self-catering property will be subject to Business Rate Property tax, you may be able to claim Small Business Rate Relief, which will reduce the amount of tax you will have to pay. You are eligible for Small Business Rate Relief if your property’s rateable value is less than £15,000. You can check the rateable value of your property on the HMRC website.
Because the government classes a FHL as a business, it means the interest rates charged on your holiday let mortgages can be deducted from the profit of your Furnished Holiday let.
Find out more on this specialist type of finance in our blog on holiday let mortgages.
When it comes to expenses, your Furnished Holiday Property is treated in a similar way to that of a business. This allows you to offset operating expenses against your revenue, as long as they are:
a) Claimed against commercial use only. If you use your property for private use, you will need to calculate what percentage of the expense is commercial.
b) Are not 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 operating expenses:
Read our blog on holiday let costs for a comprehensive look at what expenses to expect.
Before making any big decisions, we would always recommend speaking to your accountant and to our knowledgeable in-house New Properties team, who would be delighted to offer advice and more comprehensive information.
Capital Allowances (CA’s) is a type of tax relief that you can benefit from when running a holiday let business on eligible business assets. It allows you to deduct the cost of certain items that are going to be used as a part of your business from your pre-tax profits.
Holiday let capital allowances can be claimed for things such as your holiday property’s furnishings, fittings and equipment. All of which can reduce your taxable profit.
Items that can physically be moved e.g. loose items, that are not attached/affixed to the property:
Embedded fixtures that cannot be easily removed from the property:
If a property you are buying qualifies as a Furnished Holiday Let, consider the value of the embedded fixtures your acquired with or installed in your property. This will significantly reduce or eliminate your holiday letting taxable profits in the first few years. If you have never made a claim, it’s not too late if you still own the property.
Claiming capital allowances on embedded fixtures requires the skills of surveyors and capital allowances specialists. For more information, download a guide from capital allowances specialists Zeal Tax HERE
Visit the HMRC HS252 help guide for more information.
So, what’s the catch? Of course, there are always some potential disadvantages to be aware of. Here are some important things to keep in mind:
You can’t offset losses incurred by your Furnished Holiday Let in any year against any other form of income. You are however, able to carry any loss forward and offset it against eventual profit in the future. If your Furnished Holiday Let does make a loss, you can set the loss against your property’s profits in later years.
Visit the HMRC HS253 help guide for more information.
Firstly, if your turnover exceeds the VAT threshold, you will need to become VAT registered. The VAT threshold is set at £85,000 for the entire year. This breaks down to approximately £7,000 per month, which unless it’s a large, high-end property i’ts unlikely the threshold will be exceeded. However, if you run more than one property or have a separate business and are a VAT registered individual, your Furnished Holiday Let income may also be subject to VAT.
Visit HMRC for more details on VAT.
If you genuinely intended to meet the occupancy and availability levels and the reason for not doing so was out of your control, there is a potential solution if you make a Period of Grace Election.
A Period of Grace Election allows you the opportunity to still qualify as a Furnished Holiday Let despite not meeting the letting condition of 105 days in that particular year, based on the pattern of occupation and availability conditions met in previous years.
To be eligible for this solution, you need to demonstrate that you genuinely intended to let your property commercially during the year in question. You can do this by showing that you marketed your property at the same level or to a greater extent than in previous years. If your bookings were cancelled due to unforeseen circumstances, such as COVID-19, you may also be able to make an election.
Once a property qualifies as a Furnished Holiday Let in one tax year, you can elect to treat the property as continuing to qualify for up to two years later. The grace election must be made in the first tax year in which the letting condition is not met.
If you do not meet the threshold for your property to qualify as a Furnished Holiday Let by the fourth year after two consecutive periods of grace, it will no longer qualify as a Furnished Holiday Let. If this is your first year of letting, we would advise seeking professional advice.
For more information on applying for a Period of Grace Election, or to see if your property qualifies, please visit the Government website here: HS253 Furnished Holiday Lettings guide.
If you let more than one property as a Furnished Holiday Let, and one or more of these properties does not meet the letting condition of 105 days, then you can elect to apply the condition to the average rate of occupancy for all the properties. This is called an Averaging Election. You can only average across properties in a single Furnished Holiday Let business.
If you have more than one Furnished Holiday Let property you can use both solutions. This will ensure that a property continues to qualify as a Furnished Holiday Let.
If you do fall short of your occupancy levels, we would recommend speaking to an accountant to confirm your position.
Here are some links to HMRC advice on what you need to know when renting your Furnished Holiday Let:
At Coast & Country Cottages, we market and manage holiday homes all across South Devon.
Our locally based teams in Salcombe and Dartmouth have over 20 years’ experience. They are here to offer expert knowledge, advice and support to our owners.
We have also teamed up with Zeal Tax, holiday let tax specialists.
Looking for advice on holiday let tax or the best place to buy a holiday home in South Devon? We can help. We’ve put together a selection of blogs to help answer your queries and take the hassle out of holiday letting:
If you would like to find out more about letting your holiday home, call our experienced team on 01548 843773 (option 2) or visit our Let Your Cottage page to request a free Owners Guide today.
Please Note: The information contained in this article was accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time, so please contact our prospective new owner team if you’d like to hear how. Nothing in this article constitutes the giving of financial, tax or legal advice to you; please consult your own professional advisor (accountant, lawyer etc). in this regard. If we have referred within the article to a third-party provider of unregulated holiday let mortgages, this is due to the fact that such mortgages aren’t currently regulated by the FCA.
As a helpful reminder, your home may be repossessed if you do not keep up repayments on a mortgage, so again anything you decide to do in this particular area this is one on which you should take your own professional advice on too, as we aren’t providing and can’t provide you with this.