When Does A Second Home Qualify For Holiday Let Tax Benefits?

Renting out a second home as a holiday let is an enticing way to make some extra cash from a property otherwise standing idle- but welcoming guests can also open the door on a big tax bill.

Homeowners cannot just let a property on AirBnB or a similar web site and rake in the cash without tax consequences.

Special rules dictate when a property is a furnished holiday let and how HM Revenue and Customs will tax treat the owner’s earnings.

Here are the tests a property must pass to become a holiday let and to qualify for capital gains tax reliefs for traders, allowances to write of equipment and furnishings and to make rental profits qualify as earnings for pension purposes:

  • The property must be in the UK or European Economic Area – which is the European Union plus Iceland, Liechtenstein and Norway.
  • The home must have enough furniture for visitors to move in and use straightaway
  • The property has to be let with a view to making a profit, so no discounts or freebies for family or friends

Tax hurdles

Once past these hurdles, the next raft of regulations deal with how long visitors must book a holiday let during each tax year.

  • If lettings lasting more than 31 days in a row each add up to more than 155 days, the property cannot be a holiday let.
  • The property must be available as a holiday let for at least 210 days in a tax year – excluding any time the owner is staying there
  • Guests must rent the home for at least 105 days in a tax year, not counting:
    • Dates when the owner is using the property or when family or friends are staying for nothing or a discount
    • Lettings of more than 31 days in a row

What happens if the tests are failed?

HMRC does allow owners to average the time cottages are rented out as holiday homes across portfolios so under-used properties can remain furnished holiday lets.

“To benefit from these rules, you need to work out the profit or loss from your furnished holiday lets separately from any other rental business,” says HMRC.

If a holiday home fails the HMRC tests, the property comes under buy to let tax rules and loses the special trader’s CGT reliefs and the right to treat rental profits as pension earnings. Buy to lets also set-off allowances for furnishings and equipment under different rules.

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