Income Tax Relief for Holiday Lets

If you're thinking of buying and running a holiday let then you'll need to understand where you stand with income tax. Here is the key information on income tax for holiday letting that you need to know.

What is income tax?

Income tax is a tax that individuals must pay depending on their income or profits. Furnished holiday lets have the potential to qualify for a number of income tax reliefs:

• Capital Allowances (CA)

• Splitting Profits

• Trading Expenses

Capital Allowances (CA)

Properties that qualify as a furnished holiday let can also claim Capital Allowance (CA) on plant and machinery used within the business.

What is a Capital Allowance?

A Capital Allowance is effectively a form of tax relief on eligible plant and machinery items. Being able to claim a Capital Allowance reduces taxable profit, resulting in a lower amount of tax to be paid. This allowance is generally given over time. in a similar fashion to accounting depreciation.

Plant/fixtures hold a tax writing down allowance of 18%, while the tax rate for features sits at just 8%. However, if the capital spend on these along with that on movable items doesn’t exceed £200,000, you can get 100% tax relief by claiming an Annual Investment Allowance (AIA).

Capital Allowance for Furnished Holiday Lets

A proportion of the purchase price of a property can be deemed as payment for the plant/fixtures that were in place at the time.

You are also entitled to claim Capital Allowance on the fixtures, regardless of how long ago they were purchased. Take into consideration that the valuation of fixtures in a way that the HMRC deem acceptable is not simple, it’s advised to seek specialist guidance when preparing a claim.

The size of a claim can vary greatly depending on the quality and quantity of the items, however, for furnished holiday lets it is suggested that around 25% of the purchase consideration should be made up of these items.

Example:

Let’s say that the purchase price of a property is £400,000, with a 20% AIA to be claimed and a successful furnished holiday let that generates 5% taxable profit before allowances. If the property was purchased for £400,000 and in the first year a Capital Allowance survey was conducted along with a claim for £100,000 of Capital Allowances filed.

See below the taxable profits over time, assuming that the allowances are fully covered by the AIA.

What counts as plant and machinery?

In terms of tax, there are 2 types of plant and machinery:

Integral plant/fixtures, including:

• Items needed for your business (cars etc)

• The cost of demolishing plant and machinery

• Fire alarms, CCTV etc.

• Fitted fixtures including bathroom suites and integrated kitchen equipment

• Installing plant and machinery that requires building adjustments (excluding repairs)

Integral features, including:

• Heating systems

• Air conditioning

• Escalators

• Water systems

• Electrical systems

• External shading from sun

What doesn’t count as plant and machinery?

• Leased items

• Building features such as doors, gates, mains water and gas systems

• Land and structures including bridges and roads

• Business entertainment items, e.g. Boat, karaoke machine, cinema room

Can I claim Capital Allowance after buying a building from an existing business owner?

You can claim Capital Allowance if you buy from a previous business owner, however you can only claim for the features that they claimed for. You must agree the value of each item or fixture with the previous owner before processing your claim.

Splitting Profits to Maximise Tax

If you are wondering whether you can split your holiday let profits to maximise tax, you are able to halve the profit of a traditional buy-to-let with your partner should you both own 50% of the property.

However, furnished holiday lets also offer the advantage of being able to split the profit between owners at whatever rate you would like. For example, if one partner pays higher income tax, they aren’t required to declare profits in their name, but instead can allocate their profits to the other partner.

Trading Expenses

Although, Income from a furnished holiday let is declared as property income on an individual’s tax return, it is treated as trading income. Consequently, trading expenses in running your furnished holiday let can be offset against such income.

What Trading Expenses can be claimed?

• Marketing/advertising; website setup, advertisements in brochures, newspapers etc.

• Council Tax

• Water rates

• Gas, electricity, coal etc.

• Cleaning and laundry; washing up liquid, toilet rolls, laundry services etc.

• Telephone; phone calls regarding holiday letting etc.

• Repairs and Renewals; this includes expenses incurred during general maintenance and upkeep such as painting and decorating

• Insurance; building, contents, public liability etc.

• Interest on a loan to purchase or improve your furnished holiday let. This is just interest that can be offset, not capital repayments

• Letting agents’ fees

• Accounting fees; it will cost to get an accountant prepare your tax return to declare your furnished holiday let income and expenditure

• Traveling expenses; you are able to claim mileage at the fixed mileage rate to and from the property, as long as it relates purely to running the FHL and is not combined with private travel and is recorded in a mileage log

If your holiday let is used privately for part of the year, your expenses must be reasonably proportioned between private and business use.

*Information partly provided by Innes Reid, a Chester financial advice firm offering independent guidance for both private and corporate clients.

Disclaimer

The information contained in this article was accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time, so please contact our prospective new owner team if you’d like to hear how. Nothing in this article constitutes the giving of financial, tax or legal advice to you; please consult your own professional advisor (accountant, lawyer etc). in this regard. If we have referred within the article to a third-party provider of unregulated holiday let mortgages, this is due to the fact that such mortgages aren’t currently regulated by the FCA. As a helpful reminder, your home may be repossessed if you do not keep up repayments on a mortgage, so again anything you decide to do in this particular area this is one on which you should take your own professional advice on too, as we aren’t providing and can’t provide you with this.