Some areas in the UK where there is high demand for vacation or holiday accommodation offer promising returns for property investors when they classify their property as a furnished holiday let than buy-to-let, mainly because of the former’s tax efficiency.
Furnished holiday lets (FHLs) are different from the residential and commercial property categories and are a riskier trade than the latter categories, which is what makes it attractive to tax reliefs. FHLs, especially in areas where people flock less during holidays, can remain without tenants even throughout the year.
This trade also requires more marketing to appeal to potential occupants, and because the different number and kinds of people rent the property, wear and tear are rampant. More maintenance care and furnishings are needed. All these contribute to how fairly HMRC decided to pour out tax reliefs on FHLs.
In this article, we discuss what the qualifications for a furnished holiday let are, as well as the advantages and disadvantages when you classify your property as one.
What Makes a Furnished Holiday Let?
Professional property investors, after assessing an area that has a high potential for occupancy during holidays, opt for switching their properties as furnished holiday lets. This applies to accidental landlords, as well, who find themselves in a sudden situation where they have an unused property they can let out and are yet to decide how they will let their property.
If you plan to turn yours as one to take advantage of this setup’s tax efficiency, make sure it meets the following criteria:
- The property should be in the UK or in the European Economic Area.
- The property must be fully furnished, provided with enough furniture needed for normal occupation and which tenants can use.
- The property must meet the occupancy tests.
- The property must be let out for commercial purpose, such that you intend to make a profit from it.
Your property must first meet the occupancy tests. If it is your first time to let, apply the tests for the first 12 months from the start of the letting and again for the 12 months prior to the end of the letting. While if you continue to let, apply the tests to the following tax year from 6 April to 5 April. Occupancy tests are as follows:
- The property should be available for commercial rental to the public for a minimum of 210 days (30 weeks) annually.
- There should not be more than 155 days (22 weeks) of “long occupation” if the same person occupies the property for more than 31 days in a year.
- The property must be rented out to the public for a minimum of 105 days (15 weeks) out of the 210 days it is available for rent. Personal or discounted use by the owner, their family, or friends does not count towards this requirement.
In cases such as when your total lettings exceeding 31 continuous days have gone more than 155 days in one year, your property will not be considered as a furnished holiday let for that tax year.
Advantages of Having a Furnished Holiday Let
Tax efficiency is not all there is to FHLs. Here are some reasons that make furnished holiday lets appealing to property investors or landlords:
- Capital Allowances
Capital allowances for furnishing costs don’t apply to long-term rental properties, but they do with furnished holiday lets. Any expenses incurred from furnishing your holiday rental property to increase its profits can be deducted from your income before any tax deductions are made. Be sure to deduct these expenses when you are disclosing your rental income through Let Property Campaign or tax return if you have already registered for self-assessment.
You can claim capital allowances on fixtures incorporated in the property purchase, which could amount to over 20% of the property cost. These fixtures may include carpets, furniture, appliances, and hot tubs. Other tax-redeemable expenses include repairs, cleaning, laundry, water and business rates, fire safety equipment, gardening, letting commission, motor expenses, insurance, and more.
As long as your total spending in a year doesn’t exceed £1m, you can claim capital allowances on these expenses for your furnished holiday lets.
- Capital Gains Tax Relief
Once you sell your FHL property, you are eligible for certain reliefs, which are normally not available for regular rental properties. You can claim CGT reliefs for the sale of FHLs, such as entrepreneur’s relief, roll-over relief, and hold-over relief.
- Pension Contributions
The profits you obtain from furnished holiday lettings are considered “earned income” for tax purposes, unlike profits from regular rental properties which are not considered earnings for pension purposes. If you should make pension contributions, the amount you contribute will be based on your earned income.
Pension contributions can offer significant tax benefits, especially for those who pay higher or additional taxes, as targeted contributions can provide a tax reduction of more than 46%. It’s important you seek professional advice as soon as possible, as pension contributions must be made in the same tax year as the relief is claimed, and timing is crucial.
- Mortgage Interest Relief
The major advantage of FHLs is that the mortgage interest is fully deductible, unlike regular residential lettings, where the amount you can claim relief for is largely limited.
- Split Profits Between Spouses
For regular property rentals, profits are split equally by default. However, with FHLs, profits are allocated fairly according to the person’s contribution to letting the property as long as there is sufficient evidence.
Disadvantages of Having a Furnished Holiday Let
With its advantages come cons too. Here are some aspects in which having a furnished holiday let can be hassling:
- Value-Added Tax
If the total revenue generated from your holiday home property collection surpasses the current VAT limit of £85,000, then similar to all holiday lodging, you’ll have to register for VAT.
Losses from an FHL or any other property venture cannot be offset against other earnings. Instead, these losses are saved for future use and can be applied to offset profits made in the future. These losses can accumulate over the years.
- More Work Needed
When it comes to FHLs, there is more work to be done on a daily basis as you must keep track of rental days, promote, and fill rental days effectively. These require a significant amount of time and effort.
Work with tax professionals to make the most out of tax reliefs and allowances for your furnished holiday lets. Legend Financial is here to help you sort your tax obligations out and be a buffer against your tax bills.