Where a property is let out as a furnished holiday let as opposed to a longer term residential let, there are a number of advantageous tax reliefs available including the following:
Business Asset Disposal relief – Taxable gains on disposal of FHL properties are charged at a lower Capital Gains Tax rate of 10%. Gains on other residential property are charged at 18% or 28% depending on the size of the gain and the level of other income of the individual.
Hold over relief – This capital gains tax relief is available to an individual who has been gifted a furnished holiday let. Rather than crystallising the CGT liability at the date of the gift the capital gain can be ‘held over’ until the property is sold.
Roll over relief – A taxable gain can be deferred when an owner sells one FHL and reinvests in another. The gain on the disposal of the first asset can be rolled over until the replacement property is sold.
Pension contributions – Income generated from a furnished holiday let is classed as ‘relevant earnings’ which means you can make tax-advantaged pension contributions.
Split of profits between husband and wife – Long term residential rental profits must be split in the same ratio as the ownership of the property whereas furnished holiday let profits can be split to the husband and wife’s beneficial interest.
Mortgage interest – The relief available on mortgage interest on other residential property is currently restricted however all mortgage interest on a furnished holiday let is fully deductible.
Business rates/Council tax – Furnished holiday let properties do not pay council tax. They should however register to pay business rates which, in general, are lower than council tax.
Class 4 National Insurance Contributions – As furnished holiday let profits are not classed as an actual trade then they are not subject to class 4 national insurance contributions.
However there are some downsides to owning a Furnished Holiday let property which also need to be considered
If the income from furnished holiday let property exceeds £85,000 per annum then the landlord must register the business for vat. This means they must charge 20% VAT over and above the rent they charge to their guests, which can be costly.
Planning regulations can vary even in different parts of the UK therefore you will need to check with the local planning office for the property. If a property is leased then you must refer to your contract to ensure you can rent it on a short term let.
Turnover of tenants
The turnover of tenants is obviously much higher which will increase some costs such as cleaning and possibly advertising.
FURNISHED HOLIDAY LET LOSSES
Unfortunately losses from a furnished holiday let property cannot be offset against other income, not even other rental property income, however they can be carried forward to be used against a future years profits for the furnished holiday let.
Furnished holiday let losses from the UK must also be calculated separately to those from the European Economic Area (EEA) as losses arising from FHL properties can only be offset against later profits of the same income.
There are very specific criteria which must be met to qualify as a FHL which we will look at later.
Rental property income from a property in the UK or in the European Economic Area can qualify as a furnished holiday let if it meets certain occupancy conditions. The occupancy tests must be performed for each tax year (from 6 April to 5 April) to ensure all the conditions are met as if all the conditions are not met then it can’t qualify as a FHL for the relevant tax year. A new let must apply the tests to the first 12 months from when the letting commenced. Or if letting ceases then the tests must be applied to the final 12 months.
The occupancy conditions which must be met are as follows:-
The property must be available to be let as a furnished holiday home for at least 210 days in the year.
The property must actually be let as a furnished holiday home for at least 105 days in the year.
Occupation pattern condition
The total of all lettings that exceed 31 continuous days must not exceed more than 155 days during the year or the property will not be eligible as a Furnished Holiday let that year.
The rules do not state to what extent your property must be furnished but it should be to a standard that allows every day occupancy.
If you have more than one furnished holiday let property and one or more of the properties does not meet the letting condition of 105 days you can elect to apply the average rate of occupancy for all the furnished holiday lets. This is known as an averaging election.