Your guide to Furnished Holiday Let tax 2020

Owning and letting out a holiday home can be a very lucrative venture and an excellent source of income. Not only do you, your family and friends have a holiday cottage to stay in for a few weeks of the year, but a fixed asset which can pay for itself and all the extras. Understanding the intricacies and the details of Furnished Holiday Lets tax can be financially rewarding and allow 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 advantages and disadvantages of renting out your holiday home.

Quicklinks:

• What is a Furnished Holiday Let?
• How to qualify as a Furnished Holiday Let?
• What are the implications of COVID-19 on Furnished Holiday Let tax
• What are the advantages of owning a Furnished Holiday Let?
• Are there disadvantages of owning a holiday let?
• What are Furnished Holiday Let allowable expenses?

What is a Furnished Holiday Let?

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 as an owner certain tax advantages and benefits. But how does your holiday home receive this status? To be given a Furnished Holiday Let status you will need to meet certain criteria which include annual bookings, level of furnishings and availability.

How to qualify as a Furnished Holiday Let?

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 ‘trade’ by the HMRC and will need to meet the following criteria in order for you to qualify for special tax advantages.

1. Make a profit!

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.

2. Availability and occupancy for your holiday let

There are three main conditions relating to the occupancy of your holiday let that must be met in order to qualify:

1. Your property must be available for commercial holiday letting to guests and holiday makers for at least 210 days (30 weeks) per year.
2. If your Furnished Holiday Let is rented out by the same person for more than 31 days, there shouldn’t be more than 155 days ( +22 weeks) of this type of ‘long term’ occupation per year.
3. Your property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made it available. The time you or your family use the property doesn’t get counted towards this total.

But don’t worry, if you don’t qualify for the occupancy requirements, there are two options you can look at:

• If you own more than one Furnished Holiday Let, you can apply an ‘averaging election’ which is applying the letting conditions to the average rate of occupancy for all your properties.
• There’s also a period of grace (grace election) if your property has reached the required targets in previous years, but not in others.

Visit the HS253 Furnished Holiday Lettings guide 2020 for everything you need to know about occupancy rates.

3. Furnish your holiday home

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 furniture, 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 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.

What are the implications of COVID-19 on Furnished Holiday Let tax?

What happens if I do not reach my Furnished Holiday Let occupancy levels due to COVID-19?

As a result of the various lockdown measures implemented by the governments due to the COVID-19 pandemic, some holiday let businesses may not meet the various occupancy levels required to qualify as a Furnished Holiday Let.

However, 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.

What is 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.

How does the Period of Grace Election work and does my Furnished Holiday Let qualify?

You are eligible to make a Period of Grace Election as long as your property met the required occupation and availability levels in the previous year and you can show you genuinely intended to let the property commercially in that year, by showing you marketed your property in the same way or to a greater level than in previous years. You may also be eligible to make and election if your bookings have been cancelled due to unforeseen circumstances, such as COVID-19.

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 your property were to fall short of the letting requirements for a third year running, you will be unable to make another election and your property will no longer qualify as being 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 2020.

Averaging Election and Period of Grace Elections

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, 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 property as a Furnished Holiday Let, you can use both averaging and Period of Grace Elections to make sure 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.

For further guidance on dealing with the impacts Covid-19 may have had on your business, read our blog on COVID-19 government financial support for holiday let owners.

What are the advantages of owning a Furnished Holiday Let?

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:

1. Deductible holiday let expenses

Owners are 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 fixtures. Yes, this covers the cost of your kitchen too! All of this can be deducted from your pre-tax profits.

Visit the HMRC HS252 help guide for more information.

2. Capital Gains Tax relief

When selling your property, you have the added benefit of being able to claim Capital Gains Tax relief across the following areas:

Business Asset Rollover Relief

Business asset rollover means you may be able to delay paying Capital Gains Tax if you sell or use all or part of your proceeds to buy a new holiday home.

Entrepreneurs Relief

Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets.

Relief for gifts of business assets

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.

3. Tax-advantaged pension contributions

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 for more information.

4. Split your tax with a partner

If you share the ownership of your Furnished Holiday Let with your partner, you can portion the profit however you decide for tax purposes, regardless of the ownership split.

Visit the HMRC manual for more information.

5. Small Business Rate Relief for Council tax

In England, holiday lets that are available to let for 140 or more days in a year will be valued for Holiday Let Business Rates as they are classed as self-catering. 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 council tax you will have to pay. In England, 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 here.

Visit the HMRC website for more information on Small Business Rate Relief.

Are there disadvantages to owning a FHL?

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:

1. Losses on your holiday property let

You can’t offset losses incurred by your Furnished Holiday Let in any year against any 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 makes a loss, you can set the loss against your property’s profits in later years.

Visit the HMRC HS253 help guide for more information.

2. Value Added Tax (VAT) on your holiday let

Firstly, if your turnover exceeds the VAT threshold, you will need to become VAT registered. The threshold is set at £85,000 for the entire year. This breaks down to approximately £7,000 per month, which unless yours in a particularly large, high-end property, is unlikely to achieve. 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.

What are Furnished Holiday Let allowable expenses?

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 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 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

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.

Looking for further advice online?

Here is a summary of the links to get HMRC advice on what you need to know when renting your Furnished Holiday Let:

HS253 Guide on Furnished Holiday Lettings (2020)

HS252 Guide on Capital allowances and balancing charges (2020)

HS222 Guide on how to calculate your taxable profits (2020)

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.

Click here to request an Owners Guide

* At the time of writing (1st September 2019) Coast & Country Cottages has taken all reasonable care to ensure that the information contained in this article is accurate. However, no warranty or representation is given that the information is complete or free from errors or inaccuracies. Generic information is contained within this article and each individual’s tax affairs are different, further advice should be sought from an accountant.