The key difference between furnished holiday lets and residential buy-to-lets (BTLs) is holiday lets are treated as trading businesses for tax purposes, whereas BTLs are regarded as an investment, and taxed as such
This chapter looks in detail at the tax advantages and disadvantages of furnished holiday lets.
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%). Ultimately, this means you pay less tax and retain more of your profits.
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). Capital allowances can be offset against income, again meaning that you pay less tax and retain more profit.
We go into more detail of allowable expenses, including capital allowances, in the next chapter.
The income you gain from a furnished holiday let is classed as Net Relevant Earnings (NRE) for pension purposes, 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.
When you reach a certain income threshold from your holiday let (over £85,000) you must register for VAT. This has implications for your profits and pricing structure, as an additional 20% will be due on the cost of staying at your let.
Holiday lets have a much higher number of occupants than residential lets, therefore the furniture and appliances may be subject to more wear and tear and in need of more frequent replacement than in a buy-to-let.
There is more day-to-day work involved in running a holiday let, including: marketing to ensure that the occupancy threshold is met, managing a bookings calendar and dealing with customer queries and issues.
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