Ownership of second homes in picturesque areas of Britain is a contentious topic. But, let’s not forget that not all are ‘homes’ and are, in fact, businesses.
In 2018/19 – 495,000 properties in the UK were reportedly second homes, a figure that has undoubtedly risen since the Coronavirus pandemic. These properties are not all occupied or even let out as rental property, with 39% classified as furnished holiday lets (FHL). Many more second homes became FHL during the pandemic, with estimates as high as an additional 12,000 properties.
A furnished holiday let, or FHL, is a recognised classification of rental property in the UK, Ireland and other European countries.
It’s not difficult to understand why so many people and businesses own property to let as holiday accommodation. It can be very lucrative, especially as the UK ‘staycation’ is in vogue.
A furnished holiday let is not a standard rental property and has different tax rules depending on meeting specific criteria. These include the level of availability for hire, the level of furnishing and proof of actual bookings.
What counts as a furnished holiday let?
- The property must be within the UK or European Economic Area (EEA)
The European Economic Area (EEA) includes all members of the European Union (EU).
- The property must be furnished
While there are no rules governing the level of furnishing, it must include everything you’d typically expect a furnished holiday let to provide.
- You must show an intent to make a profit
The property must be let commercially with the intent of making a profit. It doesn’t matter if you don’t achieve profit, as long as you can prove an intent to do so (such as making your property available through a professional holiday lettings agency).
- The property must be available to let
Your property will have a 12-month probationary period as a newly classified FHL. After that, your property’s potential and actual availability will be reviewed.
How does a property qualify for permanent FHL status?
Your property will gain permanent FHL status if, during the first 12 months, you can prove that it was:
- Available to let for 210 days (30 weeks).
- Let commercially as a holiday property for a minimum of 105 days (15 weeks).
- There were no more than 155 days per year when the property was occupied for more than 31 days by the same person/people.
[Note: Any days that you, your friends or family spend at the property, either free or at a discounted rate, do not count towards the total commercial occupation requirements.]
If you can’t meet these criteria in full, there are a couple of concessions that may help:
Unable to meet the required occupation figures. If you have more than one FHL, you can average the occupancy figures across all properties. However, properties in the Republic of Ireland are separate from the rest of the UK.
Unable to meet the actual occupation figure (after your probationary period). If you complete a successful probationary year, you can qualify for a grace period of up to two consecutive years with HMRC. You will keep your FHL status if you meet the required occupancy levels.
What are the advantages of owning a furnished holiday let?
Tax-deductible expenses
You can claim capital allowances on your FHL. This means you can deduct the costs of furnishing and equipping the property from your pre-tax profits. Unfortunately, this isn’t an option available for long-term rental properties.
For more information on furnished holiday let capital allowances, see the HMRC HS252 helpsheet: https://www.gov.uk/government/publications/capital-allowances-and-balancing-charges-hs252-self-assessment-helpsheet/hs252-capital-allowances-and-balancing-charges-2022
Tax-advantageous pension contributions
Income generated from an FHL is ‘relevant earnings’, which means you can make tax-advantaged pension contributions.
What happens when you sell a furnished holiday let?
If you sell your FHL property, you can claim certain Capital Gains Tax (CGT) reliefs.
Entrepreneur’s Relief – HMRC charges taxable gains from FHL properties at a lower CGT rate of 10%. For other properties, they charge taxable gains at a CGT rate of 18% or 28% depending upon the size of the gain and the individual’s income level.
Split of profits between spouses for tax purposes
If you share the ownership of your FHL with your husband or wife, you can distribute your profits flexibly for tax purposes. This is in contrast to long-term rental properties where profits are distributed according to the actual ownership split (e.g. If you owned 50% of the property, you would share 50% of the profits).
Business rates and council tax for holiday lets
Holiday let business rates, or council tax is paid on second or holiday homes.
Self-catering accommodation in England, including FHL properties available for short-term lettings for more than 140 days per year, is subject to Business Rate Property Tax. If your FHL qualifies for business rates, the Valuation Office will calculate the rateable value of your property according to its type, size, location, quality and how much income you are likely to receive from letting it.
However, you can claim Small Business Rate Relief, up to 100%, depending on your area (differing rules for Wales and Scotland). Here, you would not need to pay council tax.
You can claim Small Business Rates Relief on self-catering accommodation in Wales if the property is available for letting for up to 140 days per year and is actually let out for 70 days of the year.
Business Rates Relief is handled differently in Scotland, and you should contact your local authority to confirm your eligibility.
What are the disadvantages of an FHL business?
Does VAT apply on holiday lets?
If your turnover from one or more FHL exceeds the threshold of £85,000 per year, you will need to become VAT-registered and pay the standard rate of 20%. This means you’ll have to charge guests 20% more. However, you’ll most likely need multiple FHL properties before VAT becomes something you would need to consider.
When considering how to absorb the cost of VAT, you can either include this in your rental rates or deduct it from your profits.
[Note: If you run a separate business and are a VAT registered individual, your FHL property income may also be subject to VAT.]
Business losses cannot be offset against other taxable income
Losses from an FHL business cannot be offset against other income. Instead, FHL losses are carried forward and offset against future profits. These losses can accumulate and be carried over more than one year.
What are FHL allowable expenses?
Your FHL property is treated similarly to a business. This means you can offset expenses against your revenue.
Two specific points apply:
Expenses claimed must be against commercial use only. If you, your family or friends use your property, your expense will be partly considered as ‘private use’. This means you must calculate the commercial expense percentage and claim expenses pro-rata.
Expenses must not be capital. Such as one-off payments for the purchase or construction of the property or its fixtures.
Examples of allowable expenses:
- Utility bills or refuse collection
- Interest on loans associated with the property
- Advertising or letting agency fees
- Products bought for the property (cleaning products and welcome packs)
- Maintenance and cleaning costs
- Insurance relevant to your FHL (e.g. public liability, buildings and contents insurance)
For more information on how to calculate your taxable profits, view the HMRC HS222 helpsheet: https://www.gov.uk/government/publications/how-to-calculate-your-taxable-profits-hs222-self-assessment-helpsheet/hs222-how-to-calculate-your-taxable-profits-2022
How do capital allowances apply to FHL property?
Capital allowances are tax reliefs you can benefit from when running a holiday let business. As holiday lets are classed as a business, you can deduct the cost of items that will be used as a part of your business from your pre-tax profits. So, for example, FHL capital allowances can be claimed for furnishings, fittings and equipment you will use to run your business.
What are qualifying items?
Capital allowances can be claimed against items purchased to be used as part of a business under ‘plant and machinery’. For holiday lets, these items mainly include fixtures and fittings that help your property function as a business.
There are two major categories of items that can be claimed under capital allowances:
Loose items (can be taken from the property)
- Furniture
- Furnishings
- Electrical white goods
- Small electrical appliances
Fixed items (remain with property)
- Electrical wires
- Kitchen units
- Water pipes and plumbing
- Carpets
- Repairs and replacement items (doors, windows, etc.)
When does a property stop being a furnished holiday let?
A property no longer qualifies as an FHL if it meets one of the following criteria:
- The property is sold
- The property is being used for private occupation
- The letting conditions are not met, including occupation averaging and period of grace terms
For more information on FHL requirements, see the HMRC HS253 helpsheet: https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2022
As a business prospect, the right property in the right location offers every opportunity.
The Government is looking to crack down on certain tax loopholes which have been ‘open to interpretation’ in the past or not monitored as closely as was necessary. In January of this year, the Government announced a new crackdown to take effect from April 2023. The information contained in this article takes those recent rulings into account.
Rackhams Accountants is happy to advise on any matters relating to rental property, second homes, or furnished holiday let business matters.
Visit https://www.rackhamsaccountants.co.uk for more information and to book a free, no-obligation consultation. Alternatively, call us on 01482 631700
