With 4 in 5 Brits planning a 2021 staycation, it’s easy to see why many investors are considering purchasing a holiday let. Whether you’re dreaming of a Cornish cliffside cottage or a New Forest bolthole, owning a holiday let is the ultimate dream property investment for many.
Holiday lets can be an attractive investment from a tax perspective. If you’re considering adding a holiday let to your property portfolio, read on for our summary of the main tax advantages when compared to buy-to-lets.
A furnished holiday let (FHL) is a type of short-term rental property which has a statutory definition that enables access to tax advantages.
HMRC states that to qualify as a furnished holiday let, your property must be:
Situated in the UK or European Economic Area
Commercially let out (you must intend to make a profit)
There are three occupancy conditions that a furnished holiday let must meet to qualify for tax advantages.
The property must be available to commercially let out to the public for at least 210 days (30 weeks) per year.
If let to the same person for more than 31 days, there should be no more than 155 days (22 weeks) of ‘long occupation’ in that year.
The property must be rented out to the public for at least 105 days (15 weeks) for the 210 days available. This does not include private or discounted use by yourself, family or friends.
The main difference between furnished holiday lets and buy-to-lets (BTLs) is holiday lets are treated as a business for tax purposes, whereas BTLs are regarded as an investment, and taxed as such.
If your property is classified as a FHL, you can benefit from the following:
Perhaps the biggest difference in tax between furnished holiday lets and buy-to-lets is that the full mortgage interest (section 24) can be deducted from the profits of FHLs. This relief has been tapered out for residential landlords and is now restricted to the basic rate of income tax (20%).
You can claim certain capital allowances on holiday lets that you can’t on typical buy-to-lets. These include costs of refurbishing or upgrading the property, plus furniture, fixtures and equipment to kit out the property to a luxury standard (which could increase your profit).
The income you gain from a furnished holiday let is classed as earnings, allowing you to make tax-advantaged pension contributions
When selling your furnished holiday let, certain CGT reliefs are available, including:
Business assets disposal relief
Business assets rollover relief
Gift hold-over relief
Furnished holiday lets qualify for Business Property Relief, which offers tax efficient inheritance planning.
Furnished holiday lets are treated as a business and therefore are subject to business rates. This can be both an advantage and disadvantage, however you may be able to claim Small Business Rate Relief, which means you would not pay council tax.
There are some great advantages to owning a holiday let, least of all being able to use it yourself several times a year. If you are thinking of investing in a furnished holiday let, ensure you take the following into consideration:
Research several areas and choose your location wisely
Factor in marketing costs to achieve the required occupancy rate to qualify as a furnished holiday let
Time and costs of cleaning, maintenance, repairs, and running your holiday let business
The Prime Minister’s announcement of a 1.25 percentage point rise in tax on dividend shares may come as a blow to property investors operating via a limited company, particularly after the increase to corporation tax announced in the March budget.
Gary shares his first-hand account of what it's like working with Provestor, the property accountants.