Furnished Holiday Lets & Tax

Holiday lets are treated as small businesses in tax terms. For taxation purposes, a holiday let must meet certain requirements to be considered as a ‘Furnished Holiday Let’ (FHL), the team at Original Cottages can help you ensure that your property has met said requirements, but it is always a good idea to have a grasp of these yourself.

Criteria

The property must be let with a view to making a profit.
The property must be available for at least 210 days of the tax year.
The property must be let for 105 days of the tax year.
The property must not be occupied by long-term tenants (staying more than 31 days), for more than 155 days of the tax year.

Benefits

When your home qualifies as an FHL, a number of expenses become tax deductible. A few examples are:

Capital allowances

Can potentially be claimed on items that you keep to use in your business - these are known as ‘plant and machinery’. This means the cost of furnishing and equipping your property can potentially be deducted from your pre-tax profits.

For more information, there is a help sheet:

Capital allowances and balancing charges (Gov.uk)

Pension Contributions

Profits from your Furnished Holiday Let (FHL) property count as earnings for pension contributions.

For more information, there is a help sheet:

Furnished holiday lettings (Gov.uk)

Splitting your profits

If you own the property jointly with someone else the income for tax purposes will be split to the same proportion as your property ownership. However, because FHL’s are treated as trades you can request flexibility over the proportional split.

For more information, see the link below:

Property Income Manual (Gov.uk)

Capital Gains

FHL’s are treated as a business asset, unlike longer term letting property which are considered an investment. This means that your FHL could qualify for either, entrepreneur’s relief, rollover relief or holdover relief should you consider selling, gifting to family or investing in a new FHL.

For more information on the individual reliefs, there are help sheets available:

Entrepreneurs Relief 2018 (Gov.uk)
Roll-over relief (Gov.uk)
Hold over relief (Gov.uk)

Business Rates

A self-catering accommodation which is available for short-term lettings is liable to Business Rate property tax. Your property will fall into this category and this is where the Small Business Rate Relief comes into play, with relief being as much as 100% (depending on where you live and how many FHL properties you own)

For more information, refer to the guidance:

Small Business Rate Relief (Gov.uk)

Tax Deductions

Many expenses involved in letting an FHL are tax-deductible. Permissable deductions include:

Rates
Insurance (property and public liability)
Agents fees
Cleaning
Repairs
Interest on a loan or mortgage used to purchase the property
Costs of services, gardeners, window cleaners etc
Gas & Electricity

Offsetting Losses

If you have made a loss on your FHL (expenses are greater than your income) you can reduce your tax bill by offsetting the loss against the profit from any other FHL you own in the same tax year or you can carry the loss forward to offset against FHL profits you make in the future.

You can’t however offset your FHL rental losses against your earnings or profit from other sources.

Preserving FHL status

There is a two-year grace period which allows you to continue to treat the property as an FHL where lettings to tenants have fallen below the FHL thresholds. If you have more than one property, you may be able to use the average day count across your properties in order the meet the FHL requirements.

If at any point your property doesn’t meet all the conditions it could still be counted as an FHL in certain circumstances.

If you don’t meet all the criteria and none of the special provisions apply, your property will be treated as a buy-to-let property rather than an FHL and your tax will be calculated differently.

 Find out more on the Gov.uk Furnished Holiday Letting Guidance page

This article was published on 09-Jun-22