With travel restrictions enforced during the Covid-19 pandemic, there is no denying that the short-term letting sector was severely impacted with investors of furnished holiday lettings (FHL) unable to generate an income. However, since travel restrictions were lifted, we have seen the rise in popularity of the “staycation” and the opportunity and ability for many to work from home has increased the demand for short term lettings.
Recently, the Scottish Government has introduced legislation tightening up the regulations for those investors carrying out short term letting activities.
There are many differences and advantages to the taxation of short term FHL rentals compared to residential long term tenancy lettings. However, there are also very specific tests which must be met in order for a short-term letting to qualify as a FHL.
Accommodation that qualifies as a furnished holiday let must be:
• Located in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway
• Furnished with sufficient furniture expected for normal occupation which your visitors are entitled to use
• The property must be commercially let, i.e. it is your intention to make a profit. If you let the property to friends or family for no or minimal cost, then this is not commercial.
Furnished holiday let rules: Occupancy conditions
Accommodation can only qualify as a furnished holiday let if all three occupancy conditions are satisfied:
1. The availability Condition:
The property must be available for commercial letting as holiday accommodation to the public for at least 210 days in the tax year.
2. The letting condition
The property must be commercially let as holiday accommodation to the public for at least 105 days in the tax year. There is an averaging election (if more than one FHL is owned) or a period of grace election which may help if this condition is not met every year. If you do not let your property for at least 105 days, you have 2 options (known as elections) that can help you reach the occupancy threshold:
• the averaging election – if you have more than one FHL property
• a period of grace election – if your property reaches the occupancy threshold in some years but not in others
3. The pattern of occupation condition.
The property must not be let for periods of longer-term occupation (normally 31 days or more) for more than 155 days during the year.
Furnished holiday lets: Tax and other points to note
- For a continuing let, apply the tests to the tax year – 6 April to 5 April the next year.
- For a new let, apply the tests to the first 12 months from when the letting began.
- When your letting stops, apply the tests to the 12 months up to when the letting finished.
- All your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business. You will need to keep separate records for each FHL business as the losses from one FHL business cannot be used against profits of the other.
- You cannot offset losses incurred by your Furnished Holiday Let in any year against any other form of income.
- If you let more than one property as a FHL, and one or more of these properties does not meet the letting condition of 105 days, you can elect to apply the letting condition to the average rate of occupancy for all the properties you let as FHLs. This is called an averaging election.
- Business Property Relief (BPR) from Inheritance Tax is not available, as FHL are seen as holding an investment rather than carrying on a trade.
- The income and expenditure must be returned on a self assessment tax return each year.
Furnished holiday lets: Capital allowances, tax treatments and other advantages
Unlike residential long term lets, for FHLs, you may claim the full amount of loan interest as an allowable deduction when calculating your profits.
You may claim Capital Allowances on the purchase of items for your furnished holiday let. This includes items such as furniture, equipment and fixtures
The eventual chargeable disposal will qualify for Business Asset Disposal Relief (BADR). Therefore, instead of the rate of Capital Gains Tax (CGT) applied to the taxable gain being either 18%, 28% or a combination of both, it will be 10% (subject to a threshold limit).
As any FHL profit is taxable as rental income, Class 4 National Insurance is not payable.
The profits are subject to income tax.
Income generated from a FHL property is classed as ‘relevant earnings’ which allows you to take this income into account when calculating the level of pension contributions you may make in a year.
You do not pay Council Tax – instead, you will pay Business Rates with the potential to make a claim for Small Business Rate Relief, which can be up to 100% depending on what area the property is located.
If you would like to speak to one of our tax team please get in touch.
