A tax guide for furnished holiday lettings
Oh, the joys of being the owner of a holiday home! You get the benefit of having that cute cottage by the sea where your family can relax during the holidays – as well as the financial rewards of renting the space out to strangers on Airbnb when you’re not using it. Everybody wins, right?
If you live in the UK, you need to be aware that Her Majesty’s Revenue and Customs (HMRC) has introduced several changes to tax laws that affect Furnished Holiday Lets (FHL).
The government sees this type of property as a ‘trade’ and therefore it falls under a different tax category than residential and commercial properties. Here’s our tax guide for Furnished Holiday Lets so that you can be informed about how these tax laws affect you.
What qualifies as a furnished holiday let?
To be considered a Furnished Holiday Let your property must be:
- Rented out for at least 105 days per year
- Available for rent for at least 210 days per year
- Furnished to a standard that allows everyday occupancy
- Used as a let by tourists and holidaymakers (i.e. not rented out to family and friends)
- Located in the United Kingdom or another country within the European Economic Area (EEA)
- A short-term rental that is not rented out for more than 31 days to one individual or family.
If your property does not qualify as a furnished holiday let, read our guide on paying tax on Airbnb income for more information.
What are the benefits of owning a Furnished Holiday Let (FHL)?
Capital Gains Tax Reliefs
The good news about having a FHL is you can claim a range of tax reliefs that are usually reserved for traders. These include Entrepreneur’s Relief, Hold Over Relief, Relief for Gifts of Business Assets, Relief for Loans to Traders and Roll Over Relief.
As the owner of a Furnished Holiday Let, you are allowed to claim Capital Allowance for items such as equipment, household fixtures and furniture. This means that if you decide to go to town with decorating and furnishing your FHL, you will be able to deduct these costs from your pre-tax profits.
Any profit that you make from your FHL is considered as ‘relevant earnings’ which means you can make tax-advantaged pension contributions.
Council Tax or Business Rates
Furnished Holiday Lets do not pay council tax. As the owner of a FHL you should register for business rates, which will be calculated by your local council. In general, these rates will be lower than council tax. To register for business rates, your FHL must be available for rent for more than 210 days per year.
How to claim capital allowances for your furnished holiday let business
Any item you buy – such as light fixtures, furniture, or electrical appliances – that is necessary for the day-to-day running of your FHL can be claimed.
Capital allowances are available from the date your FHL starts trading but you can also claim on items that you purchased before you began trading, if those items were necessary for the business to run.
You need to add together (pool) the cost of all items bought for your FHL – including the cost of improving or installing large items – during the year. You can then work out your allowance on the total cost of these items. But be aware that some items, such as heating and lighting, can’t be included in your overall pool as they attract different rates.
To find out more information about how to tally up your items, check out the self-assessment tool online.
How to claim tax relief on allowable expenses
Your Airbnb, if it qualifies as a FHL, should be treated like a business and that means you should be offsetting your expenses against your revenue. There are several things that are considered allowable expenses for tax purposes including:
- Interest on loans that relate to the property
- Advertising costs
- Heating and lighting
- Any fees associated with a letting agency or Airbnb management company
- Cleaning fees
- Maintenance and gardening fees
- Utility bills.
Remember that you can only claim these for the periods of time that your FHL is rented out to holidaymakers and guests – not for any time that your family or friends stay at the property.
What could be the disadvantages of owning a Furnished Holiday Let?
Making money from your Airbnb is definitely why most people decide to turn their property into a holiday let but you need to be aware that if you start to make a serious profit, the government requires that you register for VAT.
To put this into perspective – you would need to be charging over £1635 per week and you would need to have rented out your FHL consecutively for 52 weeks in order to go over the threshold, which is £85,000. Most Airbnbs will not even come close to this kind of income but it’s important to be aware of VAT regulations.
How do planning regulations affect a Furnished Holiday Let?
It’s vital that you understand the planning regulations in your area as they differ across the United Kingdom. For example, there are strict rules in place in the Greater London Area that require FHL owners to apply for planning permission if they want to rent out their space for more than 90 days. Read our blog to learn more about the 90-day rule.
For your FHL status to become official and permanent, the potential versus the actual availability of your property will be reviewed over a 12-month trial period. During this time, your property must meet the requirement outlines above to qualify as a FHL.
If your property does not meet the letting condition of 105 days, and if you happen to own more than one FHL property, there is the option of applying the letting condition to the average rate of occupancy for all your FHL properties – known as an averaging election.
Airbnb Management Services
As a professional and experienced Airbnb management service company, GuestReady can help you to increase your occupancy rates and maximise your rental yield. Schedule a call today with one of our experts for more information and make sure to check out our free Property Price Calculator.
When it comes to taxation, always seek professional advice from qualified accountants or gain self-assessment support through the official government website.
Note: This page is for informational purposes only. The information provided above isn't intended to be legal advice. If you're unclear about how any of these laws apply to you, seek advice from a lawyer or other legal advisor.