Letting out a holiday home is a great way to boost income, especially if the property is in a desirable location and can command high rates.
While far-flung international travel has taken a hit in recent years, the popularity of holiday rentals, that are closer to home, remains steady. Letting out a holiday home is a great way to boost your income, especially if the property is in a desirable location and thus can command high rates.
As a landlord with holiday lettings in their portfolio, there are different tax regulations to be aware of. Should your properties meet the stipulated criteria, you could benefit from the furnished holiday lettings tax, which will allow you to be taxed more favourably.
Before you determine how your property is to be taxed, you will need to work out whether it meets the definition of a furnished holiday let.
A holiday let is a property that is solely used for renting out as a holiday home and must be commercially let (making you a profit). This means that renting out your primary residence for a month each year during the summer does not count. Neither does a property that you allow friends and family to stay in at very little or no cost.
In terms of whether or not the property is considered furnished, this depends on whether or not the visitor is entitled to use the furniture while they stay. There should be sufficient furniture provided for normal occupation, such as beds, lounge furniture, dining room furniture, and storage. An empty house cannot be considered a furnished holiday let.
The property must be in the UK or in the European Economic Area, which includes the EU member states as well as Iceland, Liechtenstein, and Norway, to qualify for the tax benefits of a furnished holiday let. This does not mean that you have to be living in the same country as your property.
Once you are satisfied that your property comfortably meets the definition of a furnished holiday let, you must ensure that it meets all three of the following conditions:
Throughout the tax year, the property must be available for commercial letting to the public for at least 210 days. While a property is owner-occupied, it cannot be considered available for letting. An owner can move out of their property during the holiday season but only if it is still available for the 210 days.
Throughout the tax year, the property must be commercially let to the public for at least 105 days. Any days where the property is let to friends or family at reduced rates are not counted. If you do not let for 105 days, the averaging election (if you own more than one holiday let) or period of grace election can help you meet the occupancy threshold.
Lettings that exceed 31 days must not equal more than 155 days over the course of the year.
For example, if you let your property six times for 31 days each, it will not qualify as a furnished holiday let (6 x 31 = 186 days).
For furnished holiday lettings, there are special tax rules for rental income. Some of the benefits are as follows.
If your property qualifies as a furnished holiday let, you can claim Capital Gains tax reliefs. For example, the furnished holiday let entrepreneurs relief is available when a qualifying business (or part of it) is sold within three years of business’s cessation.
Another benefit is that you will be entitled to capital allowances on certain expenses such as furniture. This is particularly useful for holiday lettings, where the furniture is likely to be subject to more wear and tear due to the regular turnover of guests. Examples of other allowable expenses are:
The profits you make from letting out a qualifying holiday home will count as earnings for pension purposes.
Under the Rent a Room scheme, you can earn up to £7,500 tax-free if you rent out a spare room in your primary residence. This, however, does not apply to full property rentals. Any income that you make from letting out a property as a holiday let is taxable. You will need to calculate your taxable profits, either yourself or with the help of an accountant, to determine how much tax you owe.
Your property will no longer be considered a furnished holiday let if:
Should your property meet one of these conditions, you will not be eligible for the furnished holiday lettings tax benefits.
All furnished holiday lets in the UK are taxed as a single UK furnished holiday let business. As such, you will need to keep separate records for each furnished holiday let business because the losses from one FHL business cannot be used against the profits of the other.
In order to accurately determine your taxable income, it is important that you track your income and expenses throughout the year for each of your furnished holiday lets separately.
Using a purpose-built property management software system like Landlord Studio will help you manage your rental property accounting as you can categorise expenses, upload receipts and documents and create reports. By the time the tax season rolls around, all of your records will be organised and easily accessible. You will be able to reap all of the benefits of furnished lettings holiday tax.
“We hope you found this blog interesting! However, do note that the information in this article does not constitute advice. This blog is for general informational and educational purposes only and should not be used as a substitute for competent legal and/or other advice from a licensed professional.”