Where a property is located in a holiday region, a consideration will be whether to let it as a furnished holiday let or on a longer-term basis. As well as differing rental income, there are tax differences to consider too.
Furnished holiday lets
From a tax perspective, special rules apply to furnished holiday lets, which provide a number of advantages compared to the tax regime applying to other rental business.
Furnished holiday lettings:
- benefit from capital gains tax reliefs for traders such as business asset rollover relief, entrepreneurs’ relief, relief for gifts of business assets and relief for loans to traders;
- benefit from availability of plant and machinery capital allowances for items of furniture, fixtures and fittings; and
- profits count as earnings for pension purposes.
To benefit from these advantages, any furnished holiday lettings are treated separately from other lets and the profits must be worked out separately for each furnished holiday lettings business.Further advantages have been detailed further down.
What counts as a furnished holiday let
The property must be in the UK or the European Economic Area and must be let furnished; the furniture provided must be sufficient for normal occupation and visitors must be able to use the furniture. The property must also be commercially let.Countries in the EEA - https://www.gov.uk/eu-eea
EEA Member States
UK and EEA lets are treated as different furnished holiday lettings businesses.
The furnished holiday letting must also pass various tests.
The occupancy tests
There are three occupancy tests and all must be met for the property to be treated as a furnished holiday letting for tax purposes.
The pattern of occupation condition
A let will not count as a furnished holiday letting if the total of all lettings that exceed 31 days is more than 155 days in the tax year.
The availability condition
The property must be available for letting as a furnished holiday accommodation for at least 210 days in the tax year.
The letting condition
The property must be commercially let as furnished holiday accommodation for at least 105 days in the tax year. Longer lets of more than 31 days are excluded unless the let extends beyond 31 days due to unforeseen circumstances (such as illness or extreme weather)
If the property fails the letting condition and is not let for 105 days in the tax year, there are two concessionary routes by which the property may still qualify – by making an averaging election or a period of grace election. The elections can be used together.
Where a landlord has more than one property which is let as furnished holiday accommodation, the condition is treated as met where an averaging election is made as long as on average each property is let for at least 105 days in the tax year. So, for example, if a landlord has 4 properties which in total were let on lets of less than 31 days for at least 420 days, the letting conditions is met under an averaging election, even if any individual property is let for less than 105 days.
An averaging election must be made by the anniversary of 31 January following the end of the tax year, i.e. by 31 January 2021 for 2018/19.
Period of grace election
The second way in which the condition can be treated as met is by making a period of grace election where it can be shown that there was a genuine intention to let the property, but this did not happen due to unforeseen circumstances. The letting condition must have been met in the year before that for which the first period of grace election is made. A second period of grace election is permitted, but if a property does not meet the letting threshold in the fourth year after two consecutive period of grace elections, it will no longer qualify as a furnished holiday letting.
Losses can now only be carried forward and set against profits from the same furnished holiday lets business.
If the property does not qualify as a furnished holiday let, the normal tax rules for rental businesses apply.
Property closed for part of the year or only part of the property let
If the property is only used as aFHLand is closed for part of the year because there are no customers, you can deduct all the expenses, such as insurance and loan interest, for the whole year, provided you do not live in the property.
If part of the property as aFHL, or where the property is used privately for part of the year, apportion of receipts and expenses on a reasonable basis is required.
Pay no stamp duty
Static caravans are almost always exempt from SDLT law. This exemption is just one of the many reasons why so many people choose to not only purchase a park home, in which to enjoy holidays and vacation time, but to live permanently.
Pay no council tax
Furnished holiday lets must be registered with their local for business rates. Due to the general location of holiday homes, business rates will almost always be cheaper than council tax.
Pay a flat rate on capital gains tax
Furnished holiday lets are subject to capital gains tax. Fortunately, furnished holiday lets are classified as a business, meaning tax on the first £11,000 is exempt and a flat rate of 10% is payable on the rest. Compared to 18% & 28% for residential property.
Share the profit between partners
Furnished holiday let status allows you to split profits flexibly between partners for tax purposes. For example, if the profit pushes one partner into the higher income tax threshold, a greater proportion of profit can instead be given to the other partner to remain tax efficient.
Be aware of the VAT threshold
If you start to build out a holiday home portfolio, and you start to make a serious profit, then you may need to become VAT registered.
Quick notepad maths suggests that you only exceed the VAT threshold (£85,000) if you let your property for over £1634 per week for a full year. As you can imagine, pretty unrealistic for a single holiday home.