Furnished holiday lets: what are the tax benefits?

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Tax Benefits: Furnished Holiday Lets (FHLs)

Holiday lets offer an interesting route to property development. As with Airbnb rentals, they’re looking particularly lucrative these days as the popularity of UK staycations continue to grow. 

But properties which qualify as ‘furnished holiday lets’ (or ‘FHLs’) also come with a number of tax benefits of their own.

Let’s explore those benefits – and how your holiday let could qualify as an FHL…

How does tax work for Airbnb owners?

Mortgage interest tax relief

There was a time when all landlords could claim tax relief on their mortgage interest costs.

These days, residential buy-to-let landlords are locked out of claiming relief; but this doesn’t apply to furnished holiday let owners.

If you own an FHL, you can still deduct 100% of your mortgage interest expenses from your taxable income, which will help to minimise your tax bill.

Capital allowances

If you want to upgrade the fixtures and furnishings in a traditional residential buy-to-let, you’ll need to do it out of your own pocket. 

It’s a different story for furnished holiday lets, where you’re free to claim capital allowances (or ‘CAs’). These are tax-deductible expenses which are usually reserved for business purchases; but holiday lets are eligible too.

This means you can maximise the rental price of your property by spending out on luxury upgrades, then subtract the cost of those upgrades from your taxable profits. Win-win!

Pension contributions and tax relief

When it comes to building your pension pot, the amount of tax relief you receive on contributions is limited to 100% of your ‘relevant earnings’.

Unlike the rental income received from traditional buy-to-lets, rental income from furnished holiday lets counts as relevant earnings and therefore attracts tax relief.

Capital gains tax relief when you sell

When it’s time to sell on your holiday let, you might be able to mitigate the capital gains tax via a variety of relief methods:

  • Business asset disposal relief – previously known as entrepreneurs’ relief, which reduces the CGT rate on the first £10 million lifetime gains from up to 28% to just 10%.
  • Holdover relief – if you choose to gift or sell your FHL at a reduced price, the CGT liability passes onto the new owner; and they only have to pay it when they sell the property on.
  • Rollover relief – if you sell your FHL and use all the sale proceeds to purchase a new FHL, you won’t have to pay CGT until you sell on the new FHL. (If the new FHL costs less than the total proceeds from the previous FHL’s sale, you can still claim partial relief.)

Does my property qualify as a furnished holiday let?

Your rental property can qualify as a furnished holiday let under the following conditions:

  • The property must be located in the UK or the European Economic Area (EEA).
  • The property must be supplied to guests in a furnished condition.
  • The property must be available to rent for at least 210 days a year and rented out at least 105 days a year (not including days when you or your family have stayed at the property).

Make note of any times when the same guest (or guests) have stayed more than 31 consecutive days. These stays don’t count towards the aforementioned 105 days rental target; and your property will only qualify as a FHL if the total number of days from 31+ day stays is 155 days or fewer.

If your property doesn’t meet these conditions, there’s still a couple of ways you can qualify…

FHL averaging explained

If you own other FHL properties, you can request an ‘averaging election’. 

As long as the average number of rented-days across all your properties is 105 days, all the properties will count as FHLs for that particular tax year.

You’ll need to claim the averaging election within one year of 31st January following the relevant tax year. In other words; if you want to use an averaging election for the tax year 2021 to 2022, you’ll need to claim it before 31st January 2024.

You can’t use FHLs located in the UK as part of an averaging election for an FHL located in the EEA. Likewise, FHLs in the EEA can’t be counted towards an averaging election for a UK property.

And of course, all the properties used in the averaging must belong to the same FHL business. You can’t include FHLs which are in another company’s name; even if you personally own both companies.

So, that’s one way your property can pass as an FHL; here’s another…

FHL period of grace explained

If your property qualified as a FHL last year, but you weren’t able to meet the 105-day target this year, you can request a ‘period of grace’ election. 

You’ll need to demonstrate that you’ve made a genuine attempt to meet the 105-day target, and of course the 210-day availability requirement must still be met. You’ll also need to demonstrate that your property met the letting requirements in the year before, too.

If you’re accepted, your property will count as an FHL for this year. 

You can apply for a second period of grace if your property also fails to qualify the next year; but after two consecutive grace periods, your property will no longer count as an FHL if it misses the 105-day target for a third consecutive year.

Combining the two

If you fail to meet FHL targets across several years, you can also utilise both elections to make sure your property doesn’t miss out on FHL status.

For example, you could use an averaging election for the 2022 to 2023 tax year, followed by a period of grace election in 2023 to 2024, and a second period of grace election in 2024 to 2025. This would allow the property to keep its FHL status for three consecutive years.

Of course, you’ll need other furnished holiday lets with an average 105 rented days between them to make the averaging election.

Need help with managing tax for your holiday let business? GNS Associates’ team of tax advisors in Uxbridge can provide a range of tax and accounting services to help you maximise your holiday rental profits. 

Call 0208 090 2604 or email info@gnsassociates.co.uk for more info today!

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