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Furnished holiday let tax

If you are looking for important information about holiday homes and tax, we’ve teamed up with Steve York, Tax Director at PKF Francis Clark. He outlines what to look for when buying a holiday home, how to run a Furnished Holiday Let (FHL) as well as the holiday let tax rules and benefits.

Tax is not always at the forefront of somebody’s mind when considering buying a holiday home. However, there are several tax implications of buying, running, and selling a holiday home.

This blog provides an overview of some of the key holiday let tax rules to consider. Including the specific benefits if your property qualifies as a furnished holiday let (FHL).

Tax can be a complex subject and differs per individual case, so we always recommend you seek professional advice.

Tax for Furnished Holiday Lets

Read our guide with everything you need to know about furnished holiday let tax. Use the quick links to navigate to a particular topic or read on to find out more.

How has the Spring 2024 Budget affected Furnished Holiday Lets?

On 6th March 2024, the Budget included an announcement that the Furnished Holiday Let tax regime would be removed from 1st April 2025. There will likely be a period of transition from that date. Technical guidance is due to be released shortly, which we’ll scrutinise alongside the legislation changes, and will update this page as soon as possible subsequently. As it stands, the tax regime in this blog is still in existence.

Buying a holiday home

Buying a holiday home

The first tax you are likely to experience is stamp duty land tax (SDLT).

If you are buying as an individual and you or your spouse own other residential property, then residential rates of SDLT will apply, enhanced by a 3% surcharge. If one of the purchasers is a non-UK resident there may also be a further 2% surcharge.

Specialist advice should be sought if you are purchasing more than one dwelling as part of the transaction. For example, if you are buy buying a home with a holiday cottage attached, or more than one holiday cottage in the same transaction.

If you are thinking of letting a furnished holiday let (FHL) consider on purchase the value of the fixtures, fittings, furnishings and integral features within the property. Integral features include items such as water systems and heating systems. You can claim capital allowances on these, which reduce your holiday letting taxable profits.

If the property has been let previously as a qualifying FHL then you will need to agree with the seller the values of these particular elements. This needs to be done within two years of purchase. If it has not previously been let as an FHL then you should obtain written confirmation from the seller of that fact.

From the outset, it is important to decide how you are going to operate your furnished holiday let business.

The tax implications may be different depending on whether you are operating as individuals either in sole or joint names, as a partnership or through a limited company. Getting this right from the start can prove beneficial as it is often harder to change at a later date.

Running a Furnished Holiday Let (FHL)

Running a FHL

To qualify as a furnished holiday let, the property must meet the following criteria:

  • It must be available to let commercially to the public for at least 210 days a year
  • It must be let as such for 105 days a year
  • It must not be in the same occupation for more than 31 days in more than 155 days of the year

Where the other criteria are met in year one, but despite best efforts the letting days did not reach the minimum occupancy in later years, then it may be possible to make a ‘period of grace’ election. HMRC will still allow the property to be treated as a furnished holiday let, however the actual criteria must be met at least once in three years.

The covid pandemic and in particular the lockdown periods meant that in many cases the day counts were not able to be met, on a strict interpretation of the rules. However, HMRC has taken a pragmatic approach to this to date. Given the importance of the tests for the furnished holiday let tax rules, you should take advice for the tax years affected – 2020/21 and 2021/22.

HMRC tax return

When letting a furnished holiday let you will be required to report your profits to HMRC on a tax return. Your profits will be the rental income minus the allowable costs.

Allowable costs include:

  • agent fees
  • mortgage interest
  • advertising
  • repairs but not improvements
  • accountancy fees
  • business rates
  • capital allowances

This is not an exhaustive list, and it may be possible to offset some of the costs you incur before you start letting as well.

Please note that if you received a covid-related grant in respect of your furnished holiday let, then that is treated as part of your taxable income.

If you are not already in the tax system, you will need to register with HMRC by 5 October following the end of the tax year in which you start your business. Find out more about tax returns here.

Small business rate relief

The furnished holiday let may be assessed to business rates, possibly then with the offset of small business rates relief. The rules are set to change from April 2023. A property will be assessed for business rates rather than council tax if the owner can provide evidence that on the day of assessment for business rates:

  1. It will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the year after the day in question
  2. During the previous year, it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days
  3. During the previous year, it was actually let commercially, as self-catering accommodation, for short periods totalling at least 70 days

Selling your holiday home

Hopefully, by the time you sell, the property will have increased in value. A capital gain will then arise, which is taxable. Ordinarily an individual will have an annual exemption to offset against the capital gain of £12,300 per owner.

One of the benefits of a qualifying as a furnished holiday let (FHL) is that the capital gain can be taxed at 10%. But only if it qualifies for business asset disposal relief (previously known as entrepreneurs’ relief).

There is a lifetime limit on assets that qualify for Business Asset Disposal Relief (BADR) of £1M. If the property is not a qualifying as a FHL the gain is taxed up to 28%.

Sometimes families wish to pass on holiday cottages to the next generation. HMRC will treat this as if it was sold on the open market.

For non-FHLs this would trigger a capital gains tax charge. But another benefit of an FHL is that gifts can be made, and that can be elected not to be subject to immediate capital gains tax.

When you cease to let the property as a qualifying FHL there may be a claw-back of previously claimed capital allowances.

If sadly, an FHL owner dies, there are usually no specific reliefs from inheritance tax for many holiday businesses. Although some may attract business property relief in limited circumstances.

Benefits of tax on holiday lets

Benefits of tax on holiday lets

The benefits of letting as a Furnished Holiday Let (FHL) over Non-Furnished Holiday Let (non-FHL) rentals include:

  • The ability to claim capital allowances.
  • The ability to hold over capital gains on a gift to the family.
  • The potential to achieve BADR on sale – a 10% tax rate rather than 28%
  • Sale proceeds can be rolled over into a new FHL or other business and attract relief from capital gains tax.
  • If you have borrowing costs to fund the purchase of the holiday let, the interest can be offset in full against the letting profits. If you have a normal buy to let business that does not qualify for FHLs then the interest relief is restricted.

FHL profits count as earnings for pension contributions purposes.

Trusted Advisors – PFK Francis Clark

Every personal scenario or circumstance is different but hopefully this article gives you an overview of tax during the lifecycle of holiday letting.

If you would like to contact Steve York for your own tailored tax advice, then please get in touch here.

Let with Cornish Cottage Holidays

It may feel like an overwhelming task when thinking about a holiday home tax but at Cornish Cottage Holidays, our team of holiday letting experts are on hand to offer advice and put you in touch with our trusted advisors.

Find out more about letting with Cornish Cottage Holidays, request your FREE Owner Pack here or call our team on 01326 336773 (option 2) today.