Tax on Holiday Lets

Date: February 15, 2023

With increased interest rates for mortgages and high inflation, buy to let landlords are looking at ways to increase income to offset these rising costs. Furnished holiday lets can offer several advantages compared to renting a residential property on an assured shorthold tenancy including furnished holiday let tax allowances and relief (please note that unfurnished holiday lets are taxed differently).

Below, we outline how tax on furnished holiday lets is considered, outlining key additional tax reliefs and potential benefits to landlords.

Accountants for furnished holiday lettings (FHL) are becoming more popular across the UK. The likes of Airbnb and online travel agents simplified the market and opened it up to a global audience of potential tenants. These lettings, when in the right location, also have the benefit of being able to generate significantly more rental income during peak periods than traditional assured shorthold lettings.

Some legislation differs in Wales and Scotland, and this should be checked separately, although we do discuss some of the differences that apply in Wales.

What is a furnished holiday let?

To qualify as a holiday let in England, there are three conditions that must be met:

The property must be available to let for at least 210 days per year (140 days for the tax years 2011-2012 and earlier)
The property must be let for at least 105 days (70 days for the tax years 2011-2012 and earlier)
The property cannot have any periods of longer-term accommodation, classed as 31 days or more at a time, with the same tenant (except for certain conditions)

There must also be sufficient furniture provided for normal occupation, and visitors must be entitled to use this furniture.

The property must be commercially let (you must intend to make a profit and cannot let the property out to friends or family below market rent). However, if the property is let out of season to cover costs but doesn’t make a profit, the letting will still be treated as commercial.

All FHLs that are personally held by a UK individual are taxed as a single business. The profits on FHL contribute as earnings for pension purposes, which means pension contributions can be made from these earnings.

Averaging Election and Period of Grace

If a property is not let for at least 105 days in a tax year, there are two options (known as elections) that can help a landlord reach the occupancy threshold: the Averaging Election (if you own more than one FHL) and a Period of Grace Election. Both can be applied if more than one FHL is owned.

The Averaging Election

If more than one property is let as a FHL and one or more of these properties doesn’t meet the condition of being let for at least 105 days, the average rate of occupancy can be elected to apply across all properties let as FHLs. To satisfy this, the average needs to be at least 105 days across all properties. This only applies to a single FHL business.

Period of grace

If a person genuinely intended to meet the letting condition, i.e. had the property available to let and actively marketed it, but failed to secure enough short term lettings, a Period of Grace Election may be possible. This election would allow the property to qualify as an FHL.

A genuine intention to let the property during the tax year needs to be proven. This may include marketing a property at least at the same level, if not at a higher level, than previous years. It could also include lettings cancelled at short notice due to unforced circumstances.

An election can be made following a year where the FHL did meet the correct criteria (including an averaging election). An additional election can be held the following year. If it fails to meet the criteria after this, it will no longer qualify as a furnished holiday letting.

Tax on furnished holiday lets: capital gains tax relief

A range of Capital Gains Tax Relief for tenants are available for furnished holiday lets, including:

Business Asset Rollover Relief: Allowing the deferment of any Capital Gains Tax (CGT) due when certain assets are disposed of, when replaced by new qualifying assets. This allows the postponement of paying CGT until the new assets are disposed of.

Business Asset Disposal Relief: If you are a sole trader or business partner and have owned the business for at least two years before the date it is sold, this relief may apply.

Previously known as Entrepreneurs Relief, this relief reduces the amount of Capital Gains Tax (CGT) on the disposal of qualifying business assets on or after April 6, 2008. This is subject to meeting certain qualifying conditions and can reduce the capital gains tax rate to as little as 10% (for ordinary residential property, this is either 18% or 28%).

Please contact us to learn more about furnished holiday let and Business Asset Disposal Relief.

Claiming trading expenses against tax on furnished holiday lets

Income from furnished holiday lettings is treated as income, and trading expenses in running these can be offset, which includes a wide range of items, such as:

Building, contents and public liability insurance
Cleaning and laundry
Letting agent/online travel agent fees and marketing/advertising costs
Utility bills
Mortgage or loan Interest in full (restrictions against the deductibility of finance costs against a residential letting property do not apply to an FHL)
Repairs and renewals, including general maintenance expenses
Travel expenses (provided they relate purely to running the FHL)

Council Tax and Business Rates

It is worth noting that properties classified at furnished holiday lets (or properties let as holiday lets for at least 140 days a year) are not liable for council tax, instead being liable for business rates.

These can usually qualify as small businesses and are entitled to small business relief of 100% of the business rates payable if the properties have a rateable value of less than £12,000 in England.

Furthermore, properties with a rateable value between £12,000 and £15,000 in England are also entitled to relief on a sliding scale, in-line with the government’s small business rate relief policy. In Wales and Scotland, tax relief works differently, and different thresholds apply. Rules apply if you own more than one commercial property.

In 2018, Chartered Surveyors Colliers analysed the potential rates bills of 7,300 holiday homes in Cornwall and found that over 98% of these had a rateable value of less than £12,000 and were therefore not liable to pay any business rates at all.

From April 1, 2023, new eligibility rules were applied as to whether business rates apply as opposed to council tax. These are different depending on whether a property is in England or Wales.

For properties in England to continue to be eligible for business rates, a property must:

Be available for commercial letting for short periods totalling at least 140 days in the previous and current years and:
Have been let commercially for at least 70 days in the previous 12 months

For properties in Wales to continue to be eligible for business rates, a property must:

Be available for commercial letting for short periods totalling at least 252 days in the previous and current years and:
Have been let commercially for at least 182 days in the previous 12 months

The Valuation Office Agency (VOA) considers a property to be occupied immediately before midnight to ascertain if it was let on a certain day. For example, if a property was let out from Saturday evening to Monday morning, it would have been let for two days for the purpose of meeting the criteria for self-catering accommodation.

Alexander & Co – expert tax and accountancy advice for the property sector

Purchasing or converting a property to be used as a furnished holiday rental can bring increased revenue and has the advantage that it doesn’t necessarily need to be rented out all year round. With this comes a host of additional tax implications that need to be navigated.

Our expert property tax advisors and property accountants at Alexander & Co can advise clients on all these intricacies to ensure you are as tax efficient as possible.

We work with a wide range of clients in the property sector, from buy to let landlords through to housebuilders, property developers and investors, as well as architects and surveyors.