Furnished Holiday Let – Tax Guide (2021)

‘Furnished Holiday Let’ is the officially recognised term for a property which is let out on a short-term basis to provide self-catering accommodation. You may also commonly see it referred to as one of the following: 

 

Owning a ‘holiday let can be quite beneficial. It not only ensures that your family and friends have a good time during the holidays, but it also gives you the opportunity to earn some extra money. In this blog post, we'll go through the various benefits of a Furnished Holiday Let (FHL) and what it entails in terms of taxes 

 

A FHL (furnished holiday let) is a sort of rental property classification in the United Kingdom and Ireland (and a few other European countries). Owners of holiday rentals can benefit from this classification in terms of taxation. To be classified as an FHL, a property must meet certain criteria, including its availability, types of bookings, and level of service. 

 

You can claim capital allowances through your FHL. This essentially means that you can deduct the expense of upgrading your property to a luxury level (and so boosting your prospective rental income) from your pre-tax profits. For long-term rental homes, this is not an option. 

For more information on capital allowances, view this .gov page. 

 

Income received from an FHL property qualifies as "relevant earnings," allowing you to contribute to a tax-advantaged pension plan. 

See the .gov page for further details on this. 

 

You may be able to claim some Capital Gains Tax (CGT) reliefs if you sell your FHL property. Long-term rental properties are not eligible for the associated benefits, which include: 

Additional information on this can be found here. 

 

Profits from your FHL can be split flexibly between you and your spouse for tax purposes if you own it together. 

 

Profits from long-term rental properties are divided according to the formal ownership split (eg. If you owned 50 percent of the property, you would share 50 percent of the profits). You can split the profit from an FHL property as you see fit. 

 

View the Trusts, Settlements, and Estates Manual for further information. 

 

If a property is available (via short term let) for self-catering accommodation in England for more than 140 days of the year, it is subject to Business Rate property tax. 

 

As all FHL properties must be available to let for a minimum of 210 days per year, they are included in this category. This isn't all bad news, though, because you may apply for Small Business Rate Relief, which can save you up to 100% depending on where you live. You would not be required to pay council tax in this situation. 

 

If you own self-catering accommodation in Wales, you can claim Small Business Rates relief if the property is available for short-term rental for up to 140 days a year but is let for 70 days. 

 

You may be required to pay business rates if you own self-catering accommodation in Scotland. You should check with your local government to see if you qualify for Business Rates Relief, as the process differs from that in England. 

 

More information on Business Rates Relief can be found here. 

 

 

The temporarily reduced rate of VAT of 5%, announced as part of Rishi Sunak's 2021 budget statement, will be extended until September 30th, 2021. It was also revealed that a new 12.5 percent VAT rate will be in effect from October 1st, 2021, until March 31st, 2022. 

 

If the revenue from your FHL property portfolio exceeds the VAT threshold, you must register for VAT. If you own an individual FHL property, you'll need to rent it for more than £1,635 a week for the entire year (52 consecutive bookings) to reach the current VAT threshold of £85,000 per year. 

 

It pays to do the maths and be certain, but you'll likely need many FHL properties before VAT becomes a realistic consideration. 

 

If you do earn more than £85,000 per year from guests stays, you must register for VAT and pay the regular rates. This necessitates paying an additional 20% (or the interim reduced VAT rates) on top of the amount you charge guests to stay. 

 

Your FHL property income may be subject to VAT if you own a separate business and are a VAT registered individual. 

 

FHL losses cannot be offset against other sources of income; instead, they are carried forward and offset against future profits. These losses can build up over time and be carried forward. 

 

Depending on which country a property is in, the basis for determining whether you must pay business rates for furnished holiday lets varies. For additional information, see our guide to holiday rental business rates. 

 

If your furnished holiday let qualifies for business rates, the Valuation Office will determine the rateable value of your property based on its location, quality, size, type, and the expected rental revenue. 

 

Although business rates may disadvantage owners of multiple holiday lets in some situations, business rates for holiday lets may be advantageous to you. Small Business Rate Relief may be available if you only let one property and its rateable value is less than £15,000. 

 

 

Your FHL property is handled similarly to a business when it comes to expenses. 

 

This essentially permits you to deduct expenses from your income. 

 

The following are two important factors: 

 

Expenses are not allowed to be 'capital'. Expenses such as one-time payments for the property's purchase or construction, or for its fixtures, for example (capital allowances could cover these expenses instead). 

 

Allowable expenses include the following: 

 

 

The HS222 Help sheet can help you figure out how to calculate your taxable profits. 

 

 

If your property fits the following conditions, it may qualify as a Furnished Holiday Let: 

Be a resident of the United Kingdom or the European Economic Area (EEA) 

 

To be considered a furnished holiday let, your property must be located in either the United Kingdom or one of the European Economic Area (EEA) countries, which includes all European Union members (EU). 

 

Although this may appear to be obvious, it is a necessity. The guidelines don't define how fully furnished your house must be, but if you try to supply everything you'd expect from a self-catering holiday home, you'll be safe (and some of these costs may be eligible for Capital Gains Tax relief). An experienced holiday letting agency (such as Tempstay) can help you figure out the best way to accomplish this. 

 

The property must be rented out commercially to make a profit. It is not necessary to generate a physical profit: what matters is your objective. 

 

This will be easier to verify if you can produce a business plan or if you've made your property accessible through a professional holiday letting agency (again, such as Tempstay). 

 

Your property will effectively be in a ‘probationary' stage during the first 12 months of being an FHL. During this time, your property's potential and actual availability will be assessed, and in order for your FHL status to become a more permanent feature, your property must: 

 

 

Any days spent in the property for free or at a reduced cost by you, your friends, or family do not count toward the total business occupation requirements. 

 

While this criterion appears to be somewhat rigorous, there is some leeway if you are: 

 

These numbers can be averaged across numerous FHL properties (although properties in the Republic of Ireland are treated differently than those in the rest of the UK). 

 

If you met the occupation requirements the previous year, you may be allowed a grace period (for a maximum of two consecutive years). 

 

 

If a property fits one of the following characteristics, it is no longer considered an FHL: 

 

 

View the HS253 Helpsheet for further information on FHL requirements. 

 

The COVID-19 pandemic has had a severe negative impact on a variety of industries, including the holiday rental industry. The government created a number of financial assistance programmes to help holiday let owners get back on their feet. These included the following: 

 

 

More information on what relief you could be qualified for and how much you could save can be found in this guide to government financial support for holiday let owners.