Holiday Lets – How Tax Works
Buying a property as a holiday let is a popular investment, but how are holiday let properties taxed? Why are they different to normal buy to let properties? What tax will I pay if I sell my holiday let?
All questions I get asked when putting the finance in place for investors to purchase a property as a holiday let. To answer these in simple terms I hand over to Karrim Mansoor.
Qualifying as a Furnished Holiday Let (FHL)
There are several requirements for a property to be treated as an FHL.
- Most obviously, it must be furnished!
- It must also be available to rent out for 210 days a year. If you wish to spend any time in the property, then these days are excluded
- It must be Let for 105 days per year
- Stays longer than 31 days are only allowed if the total number of days in a year are more than 155 days
- The property must be let out on a commercial basis with the intention of making a profit
- It must be in the UK or in the EEA
Entrepreneur’s relief (ER)
Taxable gains from owners of FHL properties are charged at a lower Capital Gains Tax (CGT) rate of 10%.
For other properties, taxable gains are charged at a CGT rate of 18% or 28% depending upon the size of the gain and the level of income of the individual.
Tax Benefits of Operating a Furnished Holiday Let (FHL)?
Stamp Duty Land Tax (SDLT)
You still need to pay the extra 3% stamp duty when purchasing the property but there tax benefits of running an FHL.
1. Interest Payments
If a mortgage is secured on the property, then the full interest amount can be set against the income generated.
2. Capital Allowances
Entitlement to capital allowances on furniture, equipment and fittings, including plant and machinery which may be used outside the property such as a lawnmower, tools and a van.
(Note: you cannot include the cost of the property itself or the land it stands on).
3. Relevant Earnings
Profits are treated as ‘relevant earnings’ which means they can be added to other earnings such as employment for the purpose of putting them into a pension and claiming tax relief. Subject to any restriction such as the lifetime cap.
4. Capital Gains Tax
CGT relief is available at 10% when you sell the property.
5. Business Rates
If the property is based in England and let out for more than 140 days a year then it will attract business rates as opposed to council tax.
6. Small Business Rate Relief
If the rateable value is lower than £15,000 then it could get small business rate relief of up to 100%.
What you can do with losses
If your UK FHL business makes a loss, you can set the loss against your UK FHL profits of later years. Similarly, if your EEA FHL business makes a loss, you can set the loss against your EEA FHL profits of later years. You cannot set the losses of one FHL business against the profits of the other if you’ve a UK and an EEA business.
Apart from the attraction of owning a property which can also be used as a holiday home, (within the restrictions), there are clear benefits of running a Furnished Holiday Let over traditional buy to let.
Tax benefits are clear to see. No one knows what will happen in the future and maybe the loophole will close, but for now, FHL’s remain an attractive investments opportunity for those with a little excess cash and a real alternative for residential landlords.
Chartered Certified Accountant
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