With Franks Accountants
The increasing demand, yield potential and regulatory flexibility of holiday lets is inspiring more and more buy-to-let landlords to convert their long-term rental properties into short-term accommodation.
Landlords with larger property portfolios are diversifying to chase the higher returns and this shift is now filtering down to more casual landlords with just one buy-to-let.
The pandemic and more growing awareness of climate change are said to be the main contributing factors of the staycation boom. This less regulated holiday let sector is currently a super attractive proposition to investors although there is uncertainty around any future tax changes and what the implications will be.
What are the current tax advantages of Furnished Holiday Lets (FHL)?
There are a number of tax incentives if you own and let a furnished holiday lets property (FHL). They include:
Claiming Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Business Asset Disposal Relief, relief for gifts of business assets and relief for loans to traders).
Entitlement to claim capital allowance deductions for items such as furniture, equipment and fixtures.
Profits earned from holiday lets count as earnings for pension purposes.
HMRC consider FHL activity as a business. However, to qualify as an FHL landlords need to meet certain occupancy and other rules.
What are the rules for Furnished Holiday Lets?
There are a number of rules you must comply with:
The property must be in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway.
The property must be furnished. This means that there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture provided.
The property must be commercially let (you must intend to make a profit). If you let the property out of season to cover costs, but did not make a profit, the letting will still be treated as commercial.
All your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business. You will need to keep separate records for each FHL business because the losses from one FHL business cannot be used against profits of the other.
As well as these restrictions, FHL property will need to meet strict occupancy rules.
FHL Occupancy Rules
To secure the FHL tax benefits landlords will need to let FHL properties for a certain, minimum number of days each year. The occupancy rules, set on a tax year basis, are:
Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year.
You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year.
Days when the property is let to friends or relatives of the landlord at zero or reduced rates do not count towards these occupancy rules as this would not be considered a commercial let.
Longer-term lets of more than 31 days are likewise excluded unless the 31 days is exceeded because something unforeseen happens. For example, if the holidaymaker either: falls ill or has an accident and cannot leave on time or has to extend their holiday due to a delayed flight.
If you do not let your property for at least 105 days, there are two options (known as elections) that can help you reach the occupancy threshold if certain criteria apply.
Additional Admin Required
FHL landlords will need to maintain fairly detailed booking records to provide evidence that they are meeting the various occupancy rules. There will also be additional housekeeping costs and chores to deal with the increased throughput of tenants.
However, aside from the tax advantages and these chores, the potential FHL rental income should be higher than from longer term domestic lettings.
The Exodus to airbnb
With more and more landlords switching to short term lettings, rental sites such as airbnb are seeing a huge increase in listings.
An important point to note is that you could be breaching your current mortgage conditions if you choose to list your property here.
This is usually because buy-to-let mortgage affordability is calculated based on the projected income from a full year of letting a property, and holiday lettings aren’t designed for this purpose.
It’s therefore wise to speak to a mortgage broker to see which lenders offer suitable deals, or consider a specialist mortgage designed for holiday lets.
Your Next Steps
If you are a landlord and you are considering switching your property portfolio to FHL status, or simply need advice, get in touch. We would be delighted to help.
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