Tax Guide
Holiday lets and tax can feel like a bit of a minefield. We’ve put together a guide to help you find answers to some common questions. We always recommend that you seek professional advice and keep up to date with current tax guides and regulations.
The Spring 2024 Budget included an announcement that the Furnished Holiday Let tax regime would be removed from 1st April 2025. Currently, the below details are still relevant but please be aware they are subject to change.
What is a furnished holiday let?
A furnished holiday let (FHL) is a type of rental property classification in the UK, Northern Ireland, and other European countries. There are certain requirements that must be met in order to be classified as an FHL so that you can benefit from some tax advantages.
How does a property qualify as an FHL?
Furnishings are essential:
As you would expect, your property must be furnished. There are no specific guidelines of what furnishings are required, but as long as you have everything you would expect from a holiday cottage you will meet this requirement. If there’s anything you’re not sure of, get in touch with us.
Intend to make a profit:
It must be your aim to make a profit from your holiday let. While it is not essential to make a profit, you must be able to demonstrate your intent. If you have a business plan or your property is available and advertised through an agency like us at Bolthole Retreats, it will be easier to prove this.
Be available to let:
The initial 12 months of being an FHL are treated as a probationary period. This time is used to review the potential, and actual, availability of your property. If you meet the targets your FHL status will become a more permanent feature. The occupation requirements are:
- Your property must be available to let for 210 days (30 weeks).
- The property must be let commercially as a holiday property for 105 days (30 weeks).
- If occupied for more than 31 days by the same guests, there must not be more than 155 days of these longer lets across a year.
If you let your property to friends or family, whether for free or at a discounted rate, this does not count towards the commercial lettings requirement (point 2 above).
There is some flexibility with these requirements if you are:
- Unable to fulfil the required occupation levels: if you have more than one FHL property, figures can be averaged out across them (the Republic of Ireland are considered separate to the rest of the UK)
- Unable to fulfil the required occupation levels (after your probationary period): if you met the requirements in the previous year, a grace period can be granted for a maximum of two consecutive years. This retains your FHL status, as long as you meet the occupation requirements going forward.
HS253 Furnished holiday lettings (2021) – GOV.UK (www.gov.uk)
When does a property stop being an FHL?
A property no longer qualifies as an FHL if any of the following occur:
- The property is sold.
- The property is being used for private occupation.
- The occupation and letting conditions detailed above are not met.
What are furnished holiday lettings allowable expenses?
Your FHL is treated in a similar way to that of a business. This allows you to offset expenses against your revenue.
Any expenses claimed must be offset against commercial use only. If the property is used by yourself, family or friends you will need to calculate what percentage of expenses are commercial. For example, if the FHL is used privately for 3 months of a year, 75% will be considered as commercial use.
One-off payments e.g. for the purchase or constructions of the property, considered as capital, cannot be classed as expenses.
Examples of allowable expenses:
- Interest on loans associated with the property.
- Advertising or letting agency fees.
- Utility bills or refuse collection.
- Maintenance and cleaning costs.
- Products bought for the property (cleaning products and welcome packs).
What are the advantages of an FHL?
Holiday let deductible expenses:
As an FHL owner, you can claim capital allowances on your property. This means any costs from furnishing your cottage to a luxury standard (which will help increase your potential rental income) can be deducted from your pre-tax profits. You can claim on furniture, equipment and certain refurbishment costs. We advise reading the government guidance on ‘capital allowances and balancing charges’.
HS252 Capital allowances and balancing charges 2024 – GOV.UK (www.gov.uk)
Pension contributions:
Rental income from an FHL is classed as relevant earnings for pension purposes. This means you can make pension contributions with tax advantages.
When you sell your property:
When selling an FHL you can claim certain Capital Gains Tax reliefs. These include Business Asset Disposal Relief, Business Asset Rollover Relief and Gift Hold-over Relief.
Split the profits between the owners:
If you jointly own the FHL, profits can be split amongst the owners for tax purposes. You are not restricted by the official ownership split meaning for example, a couple could allocate the profits to the lowest earner.
Council tax and business rates:
You will be familiar with council tax but may not know about Business Rates. Self-catering accommodation which is available for more than 140 days for short-term lettings is subject to Business Rate property tax. All FHLs will be included in this category due to the occupancy requirements. An advantage of this is you may be able to claim Small Business Rate Relief depending on the rateable value of your property.
What are the potential disadvantages of an FHL?
VAT:
If your taxable turnover is more than £90,000 in the last 12 months, you will need to register for VAT. If this is the case, you will be required to pay 20% of the fee you charge guests as tax. Bear in mind if you are already VAT registered, your holiday let income may be subject to VAT as well. Get advice from an accountant if you need more information.
Losses cannot be offset against other taxable income:
Losses from an FHL business cannot be offset against other income. FHL losses are carried forward and offset against future profits. These losses can accumulate and be carried across multiple years.
Business rates:
If you have one FHL and qualify for business rates, you may benefit from Small Business Rate Relief. If you have more than one FHL you may be disadvantaged by business rates.
We have taken all reasonable care to ensure that the information here is accurate. However, no warranty or representation is given that the information is complete or free from errors or inaccuracies. Generic information is contained within this guide and everyone’s tax affairs are different. Further advice should be sought from an accountant and the gov.uk website.
