Furnished Holiday Lets as an investment
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A furnished holiday let (FHL) property can certainly be an attractive investment prospect, with properties in certain locations commanding a high rental yield during peak seasons. The holiday let market is becoming increasingly popular.
If you are thinking about acquiring this type of property, for tax purposes there are some important differences between FHLs and ‘traditional’ rental properties, which you should be aware of.
Qualifying as a Furnished Holiday Let
To qualify as a FHL, the property must be in the UK or EEA. It must, as the name implies, be suitably furnished, and it must be let commercially (i.e. you must intend to make a profit). In addition, it must meet the following criteria;
- The accommodation must be let out for 105 days during the tax year or accounting period (if different).
- The property must be available to let for at least 210 days during the same accounting period or tax year.
- Finally, it must not be let on one continuous let for a period of more than 31 days, or if it is, the total of all continuous lettings should not exceed 155 days in the tax year/accounting period.
There are certain elections that can be made if the accommodation met the criteria to be a furnished holiday let in one tax year, but does not meet it in the next, or next two tax years.
Why is this important?
- Qualifying furnished holiday letting businesses are entitled to claim tax relief on Capital Allowances on the costs of furniture, fixtures and certain eq
- If the property has been acquired using a mortgage, then the finance costs restrictions, which restrict the amount of mortgage interest and finance costs you can claim as an expense for normal rental properties, do not apply to FHLs.
- FHL profits also count towards the owners Adjusted Net Income for personal pension contribution allowance purposes.
The income should be reported to HMRC on a self assessment tax return, even if the overall position is a loss. Depending on the level of service provided, there are potentially a number of expenses that can be offset against the income to reduce your taxable profit, including but not limited to;
- Agency fees
- Advertising costs
- Cleaning and laundry
- Supplies of tea, coffee, biscuits, welcome baskets etc.
- Council tax or Business Rates if applicable
- Utility bills such as water, electricity and gas
- Gardening and maintenance
If you realise a loss for the year then this cannot be offset against other income, but it can be carried forward to offset against future profits of the same business of furnished holiday lets.
Capital Gains Tax
Tax advice should be sought before selling a FHL, as there are likely to be Capital Gains Tax consequences.
When a qualifying furnished holiday let is sold, Capital Gains Tax Rollover Relief could be available to defer the gain if you reinvest the proceeds in another qualifying asset.
Entrepreneurs Relief should also be available to reduce the rate of Capital Gains Tax to 10% on any chargeable gain. From 6 April 2020 new Capital Gains Tax reporting rules also came into force for the sale of UK residential property meaning the gain must be reported and tax paid within 30 days of completion of the sale, further information can be found here.
Stamp Duty Land Tax (SDLT)
Purchasing any additional property when you already have a main residence will however incur SDLT at higher rates (an additional 3% on top of standard rates), which often takes some by surprise.
Inheritance Tax (IHT)
FHLs are a rather grey area when it comes to IHT reliefs. Although the business is treated as a trade for Income Tax purposes, it is not seen as trading income for IHT purposes. Inheritance Tax ‘Business Property Relief’ is therefore generally not available to reduce the value of the property in your estate. There are some exceptions, however the level of service provided to guests needs to be more akin to that of a hotel for it to qualify and this may still face challenge by HMRC.
The making available of holiday accommodation akin to a hotel or guest house is a taxable supply for VAT purposes, accordingly, if the turnover of the business exceeds the VAT registration threshold (currently £85,000), then you would be required to register for VAT and charge (or at least account for) 20% VAT on the income.
Bear in mind that those owners who are already registered by other means (for example another business) may have to charge VAT from the outset.
Being VAT registered will mean you can recover the VAT on some of your costs, but is a sensitive matter when it comes to pricing.
For further advice about tax rules for furnished holiday let businesses for you, your family and friends, please contact a member of the tax team at Randall & Payne.
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