6th June 2019
By Joanne Colwell, Partner
It’s summer and as we start the holiday season, many of us may be tempted to consider investing in a holiday property and renting it out as a way to help finance it – a furnished holiday letting (FHL) as it’s officially known.
There are several advantages to running a furnished holiday letting business as compared with an investment rental. For example:
The alternative to a FHL is that your property rental business won’t be treated as a trade but as investment income. So you will miss out on the more favourable tax treatments.
To benefit from the tax relief available for a FHL, it’s very important that you follow the rules. Here’s an overview of the key areas that you need to consider.
The property must be situated in the UK or elsewhere in the EEA. The EEA comprises all the EU states plus Iceland, Liechtenstein and Norway. If you have properties both in the UK and in the EEA, they will be treated as two separate property businesses with their own provisions.
The property has to be available to let to the public on a commercial basis as furnished holiday accommodation for at least 210 days in a 12 month period. This cannot include any time that you spend there. The property must then be let on commercial terms for at least 105 days in the year. This cannot include to friends or relatives at zero or reduced rates.
However, if it’s let to the same person for longer than 31 continuous days it cannot be treated as a FHL. If you have longer term lettings, they must not exceed 155 days in the period in question.
If you have more than one furnished holiday property and one, for whatever reason, doesn’t meet the letting conditions but has been available and has met the pattern of occupation conditions, it is possible to make an election to average the rate of occupancy for all your FHLs. But it’s important to note that you can’t average your UK lets with those in the EEA. They must be kept separate.
When you kit out your holiday rental property you can claim tax relief known as capital allowances for equipment purchased for use in it. This includes white goods, furniture and other portable items. However, there are no capital allowances available for the cost of the property itself. Or the land it is situated on.
As a landlord of a property, you must report your rental income to HM Revenue & Customs. This is essential even if you are not making a cash profit. If HMRC feel that there has been a loss of tax, they may recover interest and penalties from the landlord. But on the other hand, if you do suffer a loss, it can be carried forward. Although only against future profits from the same business.
VAT: if your total rental income for your Furnished Holiday Letting exceeds the VAT threshold, which is currently £85,000 in a 12 month rolling period, you’ll have to register for VAT.
Business rates: you may have to pay business rates. This will depend on the level of profits your property makes. You may be entitled to small business rates relief. This can be up to 100% depending on which area you’re in.
Furnished Holiday Lettings do have a lot going for them. While the system may seem complicated at first glance, there are significant tax advantages available. Keeping good records is key and then, with professional advice, you’ll see whether you meet the requisite conditions.
Jo is a tax partner. She joined Wise & Co in 2002 and qualified as a chartered tax adviser in 2005. Her role has developed over the years and she combines a highly technical knowledge of taxation legislation with a practical and commercial approach to problem solving. She regularly advises on the tax aspects of business restructures, mergers and demergers, research and development claims, and the implementation of share option schemes.