Furnished Holiday Accommodation can provide tax advantages.
If you let out a furnished holiday cottage, check that you are making the most of available tax reliefs.
Properties which are let furnished as holiday accommodation benefit from a range of tax reliefs which are not available to other types of property letting. The special regime accorded to them includes tax advantages normally associated with trading properties, while the profits derived from the lettings are still treated as rental income.
What qualifies as a Furnished Holiday Let?
To qualify as a 'Furnished Holiday Let' (FHL) there are some rules to meet. The property must be:
- in the UK or in the European Economic Area (EEA) - the EEA includes Iceland, Liechtenstein and Norway
- furnished - there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture
- commercially let (you must intend to make a profit). If you let the property out of season to cover costs but did not make a profit, the letting will still be treated as commercial as long as it meets the availability and occupancy conditions below.
- available for letting as furnished holiday accommodation letting for at least 210 days in the tax year. Do not count any days when you are staying in the property. HM Revenue and Customs (HMRC) do not consider the property to be available for letting while you are staying there.
- let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Do not count any days when you let the property to friends or relatives at zero or reduced rates as this is not a commercial let.
In broad terms, a furnished holiday let (FHL) is treated for most tax purposes as a trading venture, the various tax reliefs available to traders are also made available to those letting the holiday accommodation. However there are certain special provisions relating to income tax, capital gains tax and inheritance tax, summarised below.
FHLs are treated as a trade for income tax purposes and accounts should therefore be drawn up in the same way as for any other trading business.
Interest on any mortgage borrowing or similar is fully tax deductible. The tax adjusted income is taxed as rental income but qualifies for pension contribution relief.
A significant advantage is that FHLs qualify for capital allowances on “plant and machinery” which includes 'Plant and machinery' used within the furnished holiday let property (furniture, white goods, etc) and potentially part of the purchase price of the property for the fixtures/ integral features (electrics, heating etc) - averaging around 25% of the purchase consideration. So for a property that cost £500k, that’s potentially £125k of allowances that can be reclaimed for the fixtures alone.
Capital Gains Tax
The reliefs which apply to FHLs for capital gains tax purposes are equally beneficial and fall into three broad categories.
On the sale of a property used throughout ownership as a FHL, any capital gain arising on disposal can benefit from ‘roll over relief’: the gain on an asset disposed of can be treated as nil and the acquisition cost of the asset acquired is treated as reduced by the amount of the gain, so the gain is deferred until the replacement asset is eventually sold. Seek professional advice if a property has not always been let as furnished holiday accommodation as there will be an impact on roll over relief.
The property is treated as a business asset. In the event of it being given away, perhaps as part of inheritance tax planning in the family, the capital gain on the disposal can be ‘held over’ to the recipient. Hold over relief operates to treat the disposal value as being the donor’s original capital gains tax base cost. The donee then takes the property at that cost price and in this way capital gains tax liability on the gift is avoided.
Entrepreneurs Relief reduces the rate of capital gains tax payable and is available for the disposal of a FHL. The availability of entrepreneur’s relief is subject to detailed conditions and therefore professional advice should always be sought.
Value Added Tax
The provision of holiday accommodation is within the scope of VAT. Therefore if the income from the FHL exceeds the VAT threshold (currently £85,000) the owner must register for VAT. The supply will be standard-rated. Care should be taken if the sole owner of the FHL is also self-employed and making taxable supplies. In this case the turnover from the sole-trade and the FHL must be aggregated in determining whether the VAT threshold has been breached.
To qualify for exemption from IHT as a business, i.e. Business Property relief, it is necessary to show that it is a business and not just property letting.
The definition of relevant business property as far as a FHL is concerned: ‘property consisting of a business or interest in a business’, that is carried on for profit. However, this excludes a business which is wholly or mainly one of making or holding investments i.e. property letting.
Additional facilities and services might include :
- operation of a website to attract custom
- personal welcome on arrival, to show customers around the property and ensure they know where everything is and how it works
- facilities for accommodating pets
- swimming pool and maintenance thereof
- barbeque facility and fuel supplies
- access to games and sporting activities
- arrangements for the enjoyment of local tourist activities
- provision of a welcome pack
- provision of at least some meals, perhaps just the first one upon arrival.
It would not be essential for all customers to enjoy all of the additional facilities and services. Many of them should be offered for additional charges, but it is the making them available that may be decisive.
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The information above does not constitute individual advice. New Forest Tax Accountants will not accept any responsibility decisions taken or not taken on the basis of the information above. Any reference to legislation and tax is based on our understanding of U.K. Law and HMRC practice at the date of publication of this Tax Guidance Note. Specific advice should always be obtained prior to taking or not taking any actions.