UK Tax Advice For A Furnished Holiday Let (FHL)

    What is a Furnished Holiday Let (FHL)? Simply put, a furnished holiday let is classified as a holiday property that is rented out for commercial purposes i.e. to make a profit. The holiday let must have sufficient furniture suitable for occupation....

    by Pass the Keys

    |

    Airbnb Management

    |

    Host

    |

    Tax advice

    |

    31 Mar 2022

    What is a Furnished Holiday Let (FHL)?

    Simply put, a furnished holiday let is classified as a holiday property that is rented out for commercial purposes i.e. to make a profit. The holiday let must have sufficient furniture suitable for occupation. In turn, the classification provides certain tax advantages to holiday let owners.


    Summary of contents for UK Tax advice for Furnished Holiday Let:


    FHL vs Buy-to-Let

    Operating an FHL business offers significant tax benefits over longer-term residential lets; there are minor differences if the business is incorporated but in general, the main advantages are:

    • Claiming relief on allowable spending on items like furniture, fixtures and fittings, and equipment - up to £1m [HMRC HS252]
    • Deferring any capital gain using 'rollover relief' and/or where the property is the subject of a gift using 'hold over relief'
    • When selling your portfolio, you may be able to claim a lower rate of capital gains tax of 10% [this is unlikely to be granted if selling just a single property]
    • Profits are classed as 'relevant earnings' for pension contributions
    • VAT registration is required if turnover is likely to exceed the threshold of £85,000 - effective 1 April the rate has returned to 20% [from 12.5% under special COVID provisions]
    • Business rates will be levied by the local authority; if your property does not qualify, council tax will be chargeable. Subject to the rateable value you may be eligible to claim business rate relief up to 100%
    • Any non-capital expenditure deemed to be "wholly and exclusively" for the purpose of the business is allowable against profit
    There are clear distinctions between FHLs and longer-term residential lets; however, the net asset value [property value less outstanding borrowings] forms part of your estate for Inheritance Tax purposes; any excess value over the current [and frozen until 2026] 'nil-rate' band - £325,000 - will be chargeable at 40%.

    Does my property classify as a Furnished Holiday Let (FHL)?

    Your property can qualify as an FHL if it meets the following criteria:

    1. Be within the UK or European Economic Area (EEA)
      To qualify as a FHL, your property must sit within either the UK or one of the countries that make up the European Economic Area (EEA), whichshutterstock_1638165715 includes all members of the European Union (EU).
    2. Your property must be furnished
      The rules do not specify to what extent your property must be furnished, but if you aim to provide everything you would expect from a self-catering holiday cottage, then you’ll be on safe ground. An experienced holiday letting agency will be able to advise you on how best to achieve this.
    3. Intention to make a profit
      The property must be let commercially with the intention of making a profit. It is not essential to physically make profit, it’s your intent that counts.
      If you’re able to produce a business plan, or if you’ve made your property available through a professional holiday letting agency, then this will be easier to prove.
    4. Be available to let
      For the first 12 months of being an FHL, your property will effectively be in a ‘probationary’ period. During this time, the potential and actual availability of your property will be reviewed and for your FHL status to become a more permanent feature, in the first year your property must:
    • be available to let for 210 days (30 weeks),shutterstock_727770814
    • be let commercially as a holiday property for 105 days (15 weeks)
    • and if occupied for more than 31 days by the same person/people, there must not be more than 155 days of these longer lettings in total across the year

    Any days that you, your friends, or your family spend on the property, for free or at a discounted rate, do not count towards the total commercial occupation requirements.

    There is some flexibility around these criteria to help you meet them if you are:

    • Unable to meet the required occupation figures:
      Averaging Election allows these figures to be averaged out across multiple FHL properties – however, properties in the Republic of Ireland are considered separate to the rest of the UK.

    • Unable to meet the actual occupation figure (after your ‘probationary’ period):
      Period of Grace Election can be made to HMRC for a maximum of two consecutive years. But you must show proof that you intended to let out your property that year e.g. marketing your property online. This means you will retain your FHL status, providing you meet the occupation requirements going forward.

    When does a property cease to be an FHL?

    The property no longer qualifies as an FHL if it meets one of the following criteria:

    • The property is sold
    • The property is being used for private occupation
    • The letting conditions are not met, including election averaging and a period of grace elections

    Your special tax treatment will no longer apply and you will need to work out any balancing allowance or balancing charge for capital allowances (see below).

    For more information on FHL qualification requirements, view the HMRC HS253 Helpsheet.


    What if my property is closed during the low season?

    If your property is used exclusively as a furnished holiday let and closed at a specific time of year, don’t worry! You can deduct all expenses such as holiday let insurance and loan interest for the whole year, providing you do not occupy the property.

    If you live in the FHL for part of the year or rent out a portion of the property as an FHL, you will need to distribute your receipts and expenses on a reasonable basis.


    Furnished Holiday Lets and Tax

    In the UK, there are special tax rules and reliefs for properties that qualify as furnished holiday lets (FHL’s). This means that a FHL is more tax-efficient than other types of property let.

    You will need to know the individual profit and loss from your furnished holiday let independent of any other rental business and record it through your annual Self Assessment please see this gov.uk help page., unless you are operating the rental property through a registered company.


    What taxes apply to an FHL?

    shutterstock_575640487
      1. VAT

        If the turnover from your FHL property portfolio exceeds the VAT threshold, you will need to become VAT registered and submit regular VAT returns to HMRC. The VAT threshold is £85,000 in total over a 52-week total period.

        So, if the income generated from your guests exceeds £85,000 in a year, you must register for VAT. This requires you to pay to HMRC VAT on your rental income. However, you would also be able to claim VAT back from HMRC on related expenses.

        If you run a separate business and are a VAT registered individual, your FHL property income may be subject to VAT also.

        From October 1st 2021 until March 31st 2022, the VAT rate for the tourism and hospitality sector was 12.5%. From 1st April 2022, the VAT rate will revert to 20%.

        Read more information on VAT.
      2. Income Taxes

        You will be taxed annually on the net taxable income from your FHL through your HMRC Self Assessment (see above).
        Losses from an FHL business cannot be offset against other income. Instead, FHL losses are carried forward to reduce your future tax bill by reducing your future taxable profits.
      3. Business Rate Property Tax “Business Rates”

        Business Rates are a business tax, levied by local councils to help pay for local services. Where properties do not qualify for Business Rates, Council tax applies instead, which is a similar tax on individuals. This section deals with Business Rates and reliefs on qualifying properties

        Business Rates are levied in England on self-catering accommodation which is available for short-term lettings of more than 140 days in any given year. Since all FHL properties must be available to let for a minimum of 210 days, they fall into this category.

        In Wales and Scotland, the basic qualification criteria are the same as in England, but there are regional variations:

        In Scotland, the tax calculation is different, therefore you are advised to contact your local authorities, more information is provided at Self-catering and holiday lets - mygov.scot

        In Wales, Business Rates only apply where the property has actually been let out for at least 70 days of the past year

        If your property qualifies for Business Rates you will need to register with your local authority who will then calculate the rateable value of your property according to its type, size, location, quality and how much income you are likely to receive from letting it.

    Small Business Rates Relief

    On the plus side, many owners are eligible for a reduction in the Rates bill of up to 100% depending on the rateable value of your property. 

    In Wales, you are eligible to claim Small Business Rates relief on an FHL if the property is and the rateable value is <£12,000

    Business Rates in Wales | Business Wales (gov.wales)

    In Scotland, relief is available where the rateable value is <£18,000

    In England, relief is available where the rateable value is <£15,000


    How can I reduce the amount of tax I pay on my FHL

    Deduct Allowable Expenses

    When it comes to expenses, your FHL property is treated similarly to that of a business. This basically allows you to offset expenses against your revenue. Two crucial points are:

    1. Expenses claimed must relate to commercial use only and should be adjusted for a % of private use. For example, if you use the property privately for 3 months of the year, 75% of your expenses will be considered as commercial.
    2. Expenditure must not be “capital” in nature. For example, one-off payments for the purchase or construction of the property, or for its fixtures (capital allowances could cover these expenses – see below).
    Here are some examples of allowable expenses:

    • Utility bills and refuse collection
    • Interest on loans associated with the property
    • Advertising or letting agency fees
    • Welcome packs
    • Maintenance and cleaning costs including cleaning products
    • Insurance relevant to your FHL (e.g. public liability, buildings and contents insurance)
    If you’re looking for advice on how to calculate your taxable profits, view the HMRC HS222 Helpsheet.

    Claim Capital Allowances

    Capital Allowances give you a deduction from your taxable profits of running a holiday let business. They relate to expenditure that is of a “capital” nature (see “Allowable Expenses” above), like furnishings, fittings and equipment that you purchase for the rental property.
    These are unavailable to long-term rental properties.

    There are two main categories of items that can be claimed under capital allowances – loose items and fixed items. Here are some examples from each:

    Loose items (items that are mobile)

    • Furniture
    • Furnishings (Eg. bed linen, cushions, curtains etc.)
    • White electrical goods (Eg. washing machine, fridge, dishwasher etc.)
    • Electrical appliances (Eg. coffee machine, TV, kettle)
    Fixed items (items that are stationary)

    • Electrical wires
    • Kitchen units
    • Water pipes and plumbing
    • Carpets
    • Repair and replacement required in the property (doors, windows etc.)
    Learn more about this topic by reading the HMRC’s Capital allowance HS252 Helpsheet.

    What are the financial planning benefits of an FHL?shutterstock_1401388799

    1. Make tax-advantaged pension contributions
      Income generated from an FHL property is classed as ‘relevant earnings’ which means you can make tax-advantaged pension contributions from it.
      For more information on this, see the HMRC HS253 Helpsheet

    2. Save tax when you sell your property
      When you sell a property you will be assessed for Capital Gains Tax (CGT) if the property is not your main residence.

      However, you may be able to claim certain Capital Gains Tax (CGT) reliefs including:
      Business Asset Disposal Relief (previously Entrepreneur’s Relief) Business Asset Disposal Relief: Work out your tax - GOV.UK (www.gov.uk)

      Business Asset Rollover Relief HS290 Business asset rollover relief HMRC help sheet

      Gift Hold-Over Relief - GOV.UK (www.gov.uk)

      These are unavailable to long-term rental properties
    3. Split the profits between your husband/wife
      If you share the ownership of your FHL with your husband or wife, profits can be flexibly distributed between you both for tax purposes.

      With a FHL property, you can portion the profit however you decide.

      With long-term rental properties, profits would be distributed according to the official ownership split (eg. If you owned 50% of the property, you would share 50% of the profits).
      For more information, see this Trusts, Settlements and Estates Manual.

    * This information was updated on 31 March 2022 and consists of generic information freely available in the public domain. Pass The Keys has taken all reasonable care to ensure that the information contained in this article is accurate. However, no warranty or representation is given that the information is complete or free from errors or inaccuracies. For specific advice appropriate for individual circumstances please contact an appropriately qualified tax advisor or accountant.

    Get started today or speak to a host advisor

    Book a call with our host advisors today and have all of your questions answered

    or call us now on 0208 050 2818