Local authorities are branding holiday homeowners tax cheats up and down the country because they are claiming business rate relief instead of paying council tax.
Table of contents
- Holiday Let Tax Advantages
- Property Rules For FHL Tax Reliefs
- Occupancy Conditions For FHLs
- Holiday Let Tax Benefits
- Holiday Let Tax Relief FAQ
- How do I calculate my taxable income on an FHL?
- How can I reduce my FHL tax bill?
- What are the downsides of paying tax against an FHL?
- Related Information
While the government has launched a consultation to pave the way for a revised tax system for holiday homes, no one is speaking up for landlords caught up in the row.
So, if you have a second home or holiday let, what tax reliefs can you claim and are you a tax cheat?
Furnished holiday lets – often termed FHLs – benefit from a range of special tax rules designed to offset the costs of providing self-catering rentals.
There are lots of advantages to qualifying for FHL tax relief, including:
- Small Business Rate Relief – Instead of Council Tax, FHLs are subject to business rates.
- Capital Gains Tax (CGT) reliefs as a holiday let owner, including business gift relief, Business Asset Rollover Relief and Entrepreneurs Relief.
- Entitlement to claim capital allowances for furnishings, including fixtures, furniture, and equipment provided as part of the holiday rental package
- Tax advantages against pension contributions as FHL profits count as earnings.
But landlords must meet numerous rules and conditions before cashing in on the tax benefits.
The row over business rate relief
Small Business Rate Relief is assessed against a commercial property’s rateable value. If the rateable value is £12,000 or less, the rates are discounted to zero.
Many local authorities in holiday areas argue this is tax avoidance as FHLs pay rates instead of council tax. Because the rates are discounted, the cash earned from council tax is lost, putting a financial strain on providing services from schools to road repairs and clearing garbage.
The law is clear. FHL owners are entitled to claim rates relief instead of paying council tax, and they are not taxed cheats.
First, look at is the property in question.
Holiday rentals subject to tax reliefs must be in the UK or a European Economic Area (EEA) country and be adequately furnished.
Furnished means providing enough furniture for a guest to fully use the property by just unpacking their possessions. Furniture would cover everything from beds, bedding and seating to cups and teaspoons.
Guests must also have full access to all the furnishings provided.
Owners must let qualifying properties make a profit, but if you happen to break even due to lower rental prices out of prime season, it still counts as a commercial rental.
Tax treatment for businesses with multiple FHLs
If you have several holiday lets, they are treated as one business for tax purposes.
The same rule applies to taxpayers with FHLs in EEA countries – each group of FHLs in each country is treated as one business.
You need to keep separate records and accounts for each business, as it isn’t possible to offset losses from one FHL business against profits made from another.
Occupancy Conditions For FHLs
There are three conditions that a holiday let must meet to gain FHL tax relief:
- The holiday rental must be available as furnished holiday accommodation for at least 210 days each year.
- An FHL must be rented by paying guests for at least 105 days a year, excluding days when a friend or family member stays at the property at a reduced rate or no cost.
- Lets of 31 continuous days or more that add up to 155 days or more in a year are not allowed.
Longer-term lets of 31 days or above don’t count towards the minimum day count unless a rental runs over because of client illness, accident or unavoidable travel delays.
Property owners who don’t let the property for at least 105 days in the year can use a rule called the averaging election, which works out the average letting time across all furnished holiday lets in the same business.
Alternatively, they can opt for a period of grace, which applies if you meet the threshold in some periods, but not others.
The day count is across a tax year unless it’s a new holiday let, in which case year one begins at the date the property first became available and ends on the following April 5.
Averaging election rules on holiday lets
Owners with more than one furnished holiday let can average the number of days rented out in one year if one property doesn’t meet the 105-day target.
The averaging election means you choose to calculate the total number of letting days as an average across the portfolio rather than calculating this per property.
- If you have four apartments and have let them out for 64, 112, 120 and 125 days, respectively, one of those properties doesn’t qualify for FHL tax relief at first glance.
- The average let days come to 105 (421 days divided across four properties), so the condition is met if you apply the averaging election rule.
Note that averaging election is only available to properties in the same FHL business, i.e. in the same country.
Periods of grace
The other process whereby an owner can meet the occupancy conditions, even without letting the accommodation out for enough days, is called a period of grace election.
This rule applies if you had every intention of meeting the requirement but could not.
Suppose you can show that the occupation pattern and availability conditions were met, but unusual occurrences such as extreme weather prevented you from hitting the minimum days.
In that case, you can still qualify for FHL reliefs.
Holiday Let Tax Benefits
If you’re unsure if your holiday let qualifies as an FHL, it’s well worth considering the requirements, as the benefits could make a big difference to your tax bill.
To summarise the reliefs available:
- Entrepreneurs Relief – CGT against FHL property sales is charged at ten per cent, a reduction on the standard 18 per cent or 28 per cent levied on other property assets such as a long-term rental investment.
- Holdover Relief – this relief entitles an FHL owner to gift the property to a relative, whereby they don’t need to pay any CGT until or unless they sell.
- Rollover Relief – owners can defer gains subject to CGT if they sell an FHL to buy another trading asset. If you were to sell an FHL asset to buy another, the revenue isn’t immediately taxable, and the tax adjustment is calculated on the value of the new FHL in the next period.
There are several other advantages, such as claiming against costs of furniture and furnishings as capital allowances. Landlords with buy to let homes cannot use this exemption.
Profits earned from a short-term holiday property are considered earnings for pensions, which means you can make significant contributions to a retirement fund.
Finally, if you own an FHL property in partnership, you and your partner can share the profits between you any way you like, regardless of what proportion of the property each individual owns.
In other scenarios, such as a jointly owned commercial business, the profits must be apportioned according to shares.
This flexibility can minimise your tax exposure or avoid one partner tipping into the next tax bracket.
Holiday Let Tax Relief FAQ
When does a furnished holiday let stop being eligible for tax relief?
An FHL will stop being eligible for tax reliefs if you sell it, use privately or fail to meet the occupation conditions – even after applying the averaging or period of grace elective treatments.
Tax reliefs or exemptions cease to apply immediately when the property no longer qualifies.
Can I offset losses against profits from a furnished holiday let?
Yes, if you make a loss on an FHL business, you can offset that loss against profits in future tax years.
The caveat is that multiple FHLs in one country are grouped as a business, but you cannot offset a loss in one country (i.e. in one collective business) against the profits in another.
How do I calculate my taxable income on an FHL?
To calculate your FHL taxable income, you need to:
- First, combine all revenue earned through short-term holiday lets.
- Next, add up all the associated and allowable expenses.
- Finally, deduct the costs from the income to arrive at your net taxable income.
It is common to make a loss in the first year due to multiple factors, including the initial costs of furnishing the property, advertising, and building up a regular clientele.
You can carry that loss forward into year two and deduct any losses against your future profits to reduce your tax bill.
How can I reduce my FHL tax bill?
As in any business or self-employment scenario, it’s wise to do some homework and ensure you’re up to date with all the allowances and exemptions you can claim, particularly if you don’t have an accountant or financial adviser.
- Property management costs.
- Spending on furnishings and furniture.
- Marketing spending.
- Property maintenance and repair costs.
- Council tax and utility bills.
Insurance premiums are also an allowance expense, along with deductions of ten per cent against the value of furniture, including TVs and other higher-cost furnishings, deducted as a capital expense on your tax return to account for wear and tear.
What are the downsides of paying tax against an FHL?
The potential downsides include the need to pay standard VAT rates if the business is registered for VAT. That means adding 20 per cent to your charges.
Registration is required if you turnover £85,000 or more per year.
You may need planning permission to change the use of a property into a short-term rental if you wish to rent out a home for more than 90 days as an FHL.
FHL owners will also need to pay business rates, instead of council tax, if the property is used as a holiday let for 140 days or more in the calendar year.
Below is a list of related articles you may find of interest.