Owning and running a holiday let can be very advantageous. Not only does it provide enjoyable holidays for your family and friends, but it also provides a potentially lucrative additional income.
In this post, we explore the many advantages of your holiday let qualifying as a Furnished Holiday Let (FHL) for tax purposes.
What is a Furnished Holiday Let?
A Furnished Holiday Let, often referred to as an FHL, is a certain type of rental property classification for qualifying properties situated in the UK and Northern Ireland (and other European countries).
This classification provides certain tax advantages to holiday let owners. There are specific requirements a property needs to meet in order to be classed as a FHL by the HMRC, such as its availability, actual bookings and level of furnishings.
Introducing Tax Experts Zeal
We know it can very difficult getting your head around tax for holiday lets, especially if you're new to letting. That's why we've partnered with tax experts Zeal; to make sure that you're not missing out on potential tax savings on your holiday let property.
Here's what Zeal's tax partner Matt Jeffery has to say about tax for holiday lets in 2024:
The unprecedented rise in demand for short-term holiday accommodation in the UK is set to continue in 2024. This is great news for holiday let owners, enabling them to achieve record profits.
Tax is one of the major factors impacting the return on investment for a holiday let owner. 20% to 45% of the profits generated are paid in taxes to HMRC! It is, therefore, imperative that holiday let owners ensure they are paying the right amount of tax.
Holiday letting benefits from favourable tax treatment. The most valuable being the ability to claim capital allowances on part of the purchase price paid for the property or the development costs to build or refurbish it. 90% of the holiday let owners we speak to have underclaimed or not claimed at all, meaning they are overpaying tax and missing out on thousands of pounds in tax savings. I would encourage all holiday let owners to review their capital allowances entitlement to ensure they are not overpaying tax.
If you own your holiday let property you could be sitting on thousands of pounds in unclaimed tax savings. To unlock them, contact Zeal today on 01633 499771.
Got a tax question? Zeal have a free helpline for Sykes owners, get in touch via Sykes@gozeal.co.uk and as a Sykes owner you have the benefit of exclusive 10% discount on standard fees.
How to qualify to be a Furnished Holiday Let
Your property can qualify as a Furnished Holiday let if it meets the following criteria:
Your property must be furnished
Although this may seem a little obvious, it is part of the requirements. The rules do not specify to what extent your property must be furnished, but if you aim to provide everything you would expect from a self-catering holiday cottage, then you’ll be on safe ground.
An experienced holiday letting agency will be able to advise you on how best to achieve this.
Intend to make a profit
The property must be let commercially with the intent of making a profit. It is not essential to physically make profit, it’s your intent that counts.
If you’re able to produce a business plan, or if you’ve made your property available through a professional holiday letting agency (such as ourselves), then this will be easier to prove.
Be available to let
For the first 12 months of being a FHL, your property will effectively be in a ‘probationary’ period. During this time, the potential and actual availability of your property will be reviewed and for your FHL status to become a more permanent feature, in the first year your property must:
be available to let for 210 days (30 weeks);
be let commercially as a holiday property for 105 days (15 weeks);
and if occupied for more than 31 days by the same person/people, there must not be more than 155 days of these longer lettings in total across the year.
Any days that you, your friends or family spend in the property, for free or at a discounted rate, do not count towards the total commercial occupation requirements.
While this requirement may seem rather strict, there is some reasonable flexibility if you are:
Unable to meet the required occupation figures - These figures can be averaged out across multiple FHL properties – however, properties in the Republic of Ireland are considered separate to the rest of the UK.
Unable to meet the actual occupation figure (after your ‘probationary’ period) - If during the previous year you met the occupation requirements, a period of grace can be granted (for a maximum of two consecutive years). This means you will retain your FHL status, providing you meet the occupation requirements going forward
When does a property stop being a furnished holiday let?
A property no longer qualifies as an FHL if it meets one of the following criteria:
The property is sold
The property is being used for private occupation
The letting conditions are not met, including election averaging and period of grace elections
For more information on FHL requirements, view the HS253 Helpsheet.
Spring 2024 Budget announcement on Furnished Holiday Lets
On 6th March 2024, the Budget included an announcement that from 1st April 2025, the Furnished Holiday Let tax regime would be removed. There will likely be a period of transition from that date. As it stands, legislation hasn't yet been introduced to effect the removal of the regime, so there is a possibility it won't be removed from 1st April 2025.
If and when the legislative changes are made technical guidance offered, we'll scrutinise, and will update this page as soon as possible subsequently. As it stands, the below is still in existence.
What are the tax advantages of running a Furnished Holiday Let?
Holiday Let Tax Deductible Expenses
Capital allowances can be claimed on your Furnished Holiday Let. Capital allowances provides tax deductions for assets used in your holiday let business. This isn’t an option available for long-term rental properties.
Capital allowances can be claimed on the furniture, furnishings and equipment you purchase for your property. They can also be claimed on certain refurbishment costs like plumbing and wiring and in many cases they can even been claimed on part of the original purchase price of your property!
Claiming capital allowances on your property purchase significantly reduces the tax payable on your holiday let profits and return on your investment. Contact the team at Zeal to see if your property qualifies for capital allowances.
For more information on capital allowances, view the HS252 Helpsheet or contact the team at Zeal tax.
Make tax-advantaged pension contributions
Income generated from a FHL property is classed as ‘relevant earnings’ which means you can make tax-advantaged pension contributions.
If you should come to sell your FHL property, you are able to claim certain Capital Gains Tax (CGT) reliefs. These are unavailable to long-term rental properties and include:
Business Asset Disposal Relief
Business Asset Rollover Relief
Gift Hold-over Relief
Split the profits between joint owners
If you share the ownership of your FHL, profits can be flexibly distributed between the legal owners for tax purposes.
With long-term rental properties, profits would be distributed according to the official ownership split (eg. If you owned 50% of the property, you would share 50% of the profits).
With a FHL property, you can apportion the profit however you decide. For example, husband and wife can allocate the profits to the lowest earner.
What are the disadvantages of a Furnished Holiday Let?
Losses cannot be offset against other taxable income
Losses from a FHL business cannot be offset against other income, instead, FHL losses are carried forward and offset against future profits. These losses can accumulate and be carried across multiple years.
What are Furnished Holiday Lettings allowable expenses?
When it comes to expenses, your FHL property is treated similar to that of a business. This basically allows you to offset business expenses against your revenue. Two crucial points are:
Expenses claimed must be against commercial use only. If you, your family or friends use your property, your expense will be partly considered as ‘private use’. This means you will need to calculate what percentage of the expense is commercial. For example, if you use the property privately for 3 months of the year, 75% of your expenses will be considered as commercial.
Expenses must not be capital. For example, one-off payments for the purchase or construction of the property, or for its fixtures (capital allowances could cover these expenses).
Here are some examples of allowable expenses:
Utility bills or refuse collection.
Interest on loans associated with the property.
Advertising or letting agency fees.
Products bought for the property (cleaning products and welcome packs).
Maintenance and cleaning costs.
Insurance relevant to your FHL (e.g. public liability, buildings and contents insurance).
Travel and subsistence (e.g. travelling to and from holiday let).
If you're looking for advice on how to calculate your taxable profits, view the HS222 Helpsheet.
In the below video, Zeal gives us a brief overview on what furnished holiday let capital allowances are:
Other holiday let tax considerations
VAT on holiday lets
If your turnover from your holiday let portfolio exceeds the VAT threshold of £85,000, you will need to become VAT registered.
If you own one holiday let, to exceed the current VAT threshold you will need to let your property for over £1,635pw, for the entire year, (52 back-to-back bookings) equating to £85,000 in total per year.
Be sure to do the maths, but you’ll most likely need multiple holiday lets before VAT becomes something you would need to consider.
If your income generated from guests exceeds £85,000 in any 12 month rolling period, you must register for VAT on holiday lets and pay the standard rates. This requires you to pay HMRC 20% of the fee that you charge guests to stay.
If you run a separate business and are a VAT registered individual, your holiday let income may be subject to VAT also.
It can be difficult to understand VAT on holiday lets so it's best to take advice from specialists like Zeal to make sure you get it right.
Council Tax for Holiday Lets
If you're running a holiday let then you'll need to know about the council tax and business rates rules in your local area.
Self-catering accommodation in England or Scotland, which is available for short-term lettings for more than 140 days in any given year, and actually let for 70 days in that year, is subject to business rates property tax rather than council tax. However, this isn’t necessarily bad news, as you may be able to claim Small Business Rate Relief, which can be up to 100% depending on the Rateable Value (RV) of the property (see below).
The RV depends on a number of factors including the size of the property and where it is located. If a holiday let qualifies for small business rates relief, there would be less, or often no, business rates to pay.
If you have self-catering accommodation in Wales, you need to be aware of changes in regulations. Prior to 1st April 2023, properties that were available to be holiday let for at least 140 days, and were holiday let for at least 70 days, would be charged business rates instead of council tax.
From 1st April 2023, properties now need to be available to be holiday let for at least 252 days and must be actually holiday let for at least 182 days in any 12-month period. Properties that can’t meet the new threshold could face a Council Tax second homes premium.
Many local authorities in Wales don’t have such premiums but, as of April 2024, some local authorities have premiums up to 200%.
The criteria that decide whether you must pay business rates for holiday lets changes depending on which country a property is in.
If your holiday let qualifies for business rates, the Valuation Office Agency (VOA) will calculate the rateable value of your property according to its type, size, location, quality and how much income you are likely to receive from letting it.
Although owners of multiple holiday lets may be disadvantaged by business rates in some cases, business rating for holiday lets could be of an advantage to you.
If you let just one property and its rateable value falls below £12,000, then you could be eligible for Small Business Rate Relief.
In Scotland, you must contact your local assessor if your property is available for rental for 140 days or more a year and rented out for more than 70 days per year. In order to calculate the rateable value of each property, the assessor applies a price per bed space based on its type, size and location.
Government Financial Support
The COVID-19 pandemic has had a significantly adverse effect on the holiday let industry, among many others. To help get holiday let owners back on their feet, the government introduced a number of financial support schemes. These included:
New Loan Recovery Scheme
Period of Grace Elections
Business Rates Relief
Tax Deferral Scheme - No longer available
Coronavirus Business Interruption Loan Scheme - No longer available
Coronavirus Bounce Back Loan Scheme - No longer available
Small Business Grant Fund - No longer available
Self-employed Income Support Scheme - No longer available
If you're thinking of buying a property or just need some advice, our property experts can help answer any queries you may have.
The advice above is given by Zeal. Sykes can’t advise you on, and isn’t responsible for, tax matters in relation to your holiday let, but it hopes that by pointing you in the direction of certain experts in the field, it’s starting you off on the right foot, and you can read into this matter further and seek your own advice from Zeal as and when you feel it’s needed.
Zeal Tax, Chartered Tax and Capital Allowance Advisors
