Compared to regular commercial let properties, furnished holiday lets (FHL) are more tax advantageous. This is mainly because holiday lets pose more risk than regular property rentals, such that they can potentially stay vacant for a longer time, making them less likely a source of stable income.
All the whilst, they demand higher expenses too—more marketing efforts to attract renters, wear and tear possibilities, tenancy cleaning, and need for furniture. The number of occupants and the fact that they change from time to time calls for more maintenance.
All these can really bring the profits down, but the UK tax authority, for these reasons, is more lenient to owners of holiday lets, especially considering their higher furnishing expenses. Given that the UK considers the expenses of holiday lets like that of any other business, the major way you can minimise taxes is by offsetting them against your income.
There are many other tax-advantageous reasons for landlords to consider having furnished holiday lets. This article talks about what makes a rental property a furnished holiday let, the kinds of taxes that holiday lets are imposed with, and the potential reliefs and allowances you can claim to minimise or altogether avoid those taxes.
What Qualifies as a Furnished Holiday Let
For holiday let properties to be eligible for tax advantages, they should be fully furnished, self-catering residential properties that are rented out for a short period, which is why they are called furnished holiday lets.
To be considered as one, they need to meet the following criteria:
- Inside the UK or European Economic Area (EEA)
It is crucial that your let property is located inside the UK or at least in one of the countries that are within the EEA, which includes all European Union (EU) members, to be considered a furnished holiday let.
- Completely Furnished
Apparently, the property you are renting out as a holiday let should be fully furnished to self-cater to occupants. There are no rules as to what extent your rental property has to be furnished, but that at least it has everything that potential occupants would look for.
- Intention to Earn from the Property
You have to prove to the UK government that your sole intention of having a furnished property is to earn from it. It helps to show them your business plan or work alongside holiday letting agencies so you can have a smoother approval process.
- Be Available to Let
In the first year that you declare your property as a furnished holiday let, it will still be in a probationary period. All throughout this timeline, your FHL property’s actual availability and potential profits will be examined closely. There are ways you can make your FHL status permanent during the first 12 months, with some special considerations from HMRC should you fail to meet one of the requirements.
It must be available for rental within 30 weeks or 210 days; must be rented out commercially as a holiday residence for 15 weeks or 105 days; and finally, if it is rented by the same people for more than 31 days, then it should not exceed to 155 days in total within the year.
FHL status is not exercised when you let your friends or family in the property at a discounted rate or free of charge. When you meet the requirements during the probationary period, HMRC will grant you a period of grace for up to two consecutive years. However, you will still have to strive to maintain your FHL status from this day onwards.
Taxes Paid for Furnished Holiday Lets
For a quick list, here are the taxes having or selling an FHL entails:
- Value added tax
- Stamp duty tax
- Capital gains tax
- Council tax
When your annual turnover exceeds the £85,000 per year threshold, you will need to have your property registered for VAT and pay 20 per cent, which usually just happens when you are renting out several furnished holiday properties.
On the other hand, you will also have to pay for the stamp duty rate, which, in the tax reform, is now greatly reduced. Whilst this comes with a 3 per cent surcharge, stamp duty liabilities do not eat up your profits anymore as much as before.
Other taxes include capital gains tax, council tax, and inheritance. These are subject to reliefs and allowances of which you can fully take advantage. Below, you will find out the different ways you can greatly minimise your tax liabilities on these for your furnished holiday lets.
Tips for Reducing or Avoiding Holiday Let Taxes
Given the higher risk of letting out a holiday property, there are several tax reduction opportunities you can use for each type of tax you will pay for your FHL.
Here are some:
- Capital Gains Tax Relief
When you sell your FHL property, you will be subject to paying capital gains tax. However, there are capital allowances and several reliefs you can claim for CGT that can greatly help you reduce your liabilities or avoid them altogether.
Begin with furnished holiday let, in which you can offset your FHL expenses against your profits. You can declare items you bought under “plant and machinery” as an allowable expense, which are usually fittings and fixtures needed to furnish your property.
Upon selling your assets and facing CGT liabilities, you can also claim entrepreneur’s relief, business asset rollover relief, business asset disposal relief, and gift hold-over relief, all of which are not available for long-term let-out properties.
- Council Tax Relief
Since FHLs provide short-term rentals for more than 140 days within a year, they are subject to business rate property tax. But depending on the area your property is located, you have the opportunity to claim small business rate relief, which can reduce even up to 100 per cent of your council tax bills.
- Pension Contributions
Another tax-reducing strategy that works well for inheritance tax planning is converting your FHL income to “relevant earnings” and then investing them as your personal pension. With pensions tax relief, you are in a tax-advantaged situation in terms of inheritance tax.
If you plan to or are already running a furnished holiday let, let the most brilliant tax experts guide you all the way from settling your tax matters to making sure you take the most advantage of the allowances, reliefs, and any other means of tax reductions as much as possible. Contact Legend Financial today!