Tax advantages of furnished holiday lets

Natasha Spicer - Menzies Accountant

Natasha Spicer – Manager

The last few years have seen several changes to UK tax legislation and for buy-to-let landlords, these changes have been particularly costly. For this reason, many landlords may consider moving away from buy-to-let and instead investing in Furnished Holiday Lets (FHL).

There are some downsides, for example there is often much more of a time commitment necessary to run a FHL over a buy-to-let property and there is no guarantee of rental income, particularly during off-peak months. Investors should also be aware that if turnover exceeds the VAT threshold (currently £85,000), they will have to register for VAT.

That being said, there are many tax advantages to running a FHL business, some of which are detailed below.  These mean that the change of portfolio could prove extremely lucrative to landlords.

What is a Furnished Holiday Let?

In order to qualify as a FHL, a property must:

  • be let on a commercial basis with the view to realisation of profit
  • be in the UK or in the European Economic Area (EEA)
  • be furnished – there must be enough furniture provided for normal occupation and your visitors must be entitled to use the furniture
  • pass the 3 occupancy conditions – these conditions determine how many days the property must be available to let and how many days it is let.

This article does not go into further detail about these conditions. If you have any questions about whether your property qualifies, please come and see us.

What are the tax advantages?

Interest relief

Unlike buy-to-let landlords, whose relief for mortgage interest is starting to taper off, owners of FHL can offset all their interest costs against business profits. This could lead to significant reductions in taxable profits.

Pension contributions

HMRC generally accepts that if you own a FHL, you are likely to be relying on the business profits as your main source of income. For this reason, profits from FHL can be categorised as “relevant earnings” for your pension contributions.

Capital allowances

Expenditure incurred on the fit out of residential properties will not qualify for capital allowances.  The good news for owners of FHL is that they will be able to claim capital allowances on items such as furniture and kitchen/bathroom fit outs as well as integral features such as electrical work and air conditioning.

Capital Gains Tax Relief

On sale of a FHL, the gain on the property will be subject to Capital Gains Tax (CGT). The rates of CGT for general buy to let properties is either 18% or 28% depending on the vendors personal tax position. FHL’s, on the other hand, are treated as a trading business which means that Entrepreneurs Relief is available, provided that the relevant conditions are met. Entrepreneurs Relief will reduce the CGT rate to 10%.

FHL’s are also able to benefit from roll over relief. The effect of this is that any capital gain will be deferred when all proceeds are reinvested into another FHL or any other asset used for trading purposes.

Inheritance Tax

Unlike for capital gains purposes mentioned above, FHL’s are usually treated as an investment activity rather than trading activity when it comes to inheritance tax. The impact of this is that Business Property Relief will general not apply and so interests in FHL businesses will not be exempt from inheritance tax.

So why mention this in an article about the tax benefits of FHL? The answer is that, whilst not guaranteed, there may still be a way for FHL to qualify for Business Property Relief and that is if the business could be classed as a trading business.

For this to work, FHL’s would need to show that they are providing substantial additional services over and above the normal active management of the property. Examples of such activities could be booking restaurants and activities, hire of equipment, laundry facilities etc. To put it simply, the closer the property is to running as a hotel, the better the chance of claiming Business Property Relief.

Posted in Blog, Hospitality & leisure