Tax implications of holiday lets

According to reports, the UK has more than 300,000 second homes or holiday homes. Many regard it as a sound investment and an expanding asset class, with homeowners adding holiday accommodation in a variety of inventive methods, including shepherd huts, hobbit homes, and converted agricultural buildings.

Holiday lets and its eligibility criteria

HMRC defines holiday lets quite clearly, and it may be beneficial to begin by defining what it deems to be a holiday home. A holiday property must be habitable and commercially rented with the goal of making profit.

1. Availability and letting condition -

   Each tax year, the property must be available for rent for at least 210 days and rented for at least 105 days. If a property remains vacant for more than 105 days within a tax year, the owner has two alternatives. If they own multiple holiday lets, they can average the number of days rented across all of their properties. If they own only one, HMRC allows for a grace election, which allows for days to be transferred from prior or subsequent years.

2. Occupation condition -

   Lettings to family and friends at a reduced or zero rent rate, as well as any rentals lasting more than 31 days will not be included in those 105 days.

A holiday home is not considered to be a holiday home when it is occupied permanently, sold, or the required number of let days’condition is not satisfied.

Tax implications of holiday lets

Once your property is classed as an FHL, you can take advantage of certain tax benefits, including the following:

1. Business assets disposal relief -

   As a business, sales of holiday lettings may qualify for business rollover relief, which means that you may avoid paying capital gains tax (CGT) on the proceeds of the sale if you reinvest them in another qualifying business asset. Similarly, if you recently sold another business, you may be able to roll your capital gains into the acquisition of a holiday let property, avoiding CGT until the property is eventually sold.

   If you have no intention of reinvesting the proceeds from the sale of your holiday letting business, you may be eligible for Business Asset Disposal Relief (after meeting the number of specified criteria), which limits the CGT rate on the gain to 10 per cent, in comparison to the normal buy to let gain rate of 28 percent. You may get access to “hold over relief”, where you can hold over any gain resulting from the gifting of property. This effectively delays any capital gains tax on the property until the new owner sells it.

2. Mortgage interest relief -

   Considering a progressive decline in mortgage interest relief for normal buy-to-let properties and the impact on landlords, you may be surprised to learn that qualifying holiday lets continue to benefit fully from mortgage interest relief. This might have a significant impact on your letting business profitability.

3. Business rates -

   If you own an FHL, your property will be classified as a business, making it subject to business rates and exempt from council tax. It’s a mandatory condition, not optional. Before you worry and believe this is bad, business rates can be significantly less than council tax, resulting in huge savings. Even certain properties can be eligible for business rate reductions.

4. Capital allowances -

   If you set up a new holiday let, for example, by converting a demolished agricultural building, you are allowed to claim capital allowance tax relief against future profits. Capital allowances will be extended to plant and machinery, which will include heating and sanitary ware in the case of property. They can also be used to offset the cost of white goods. Capital allowances are not time-limited and can be used to offset tax on profit from the holiday let.

5. VAT -

   Generally, longer-term rental income is exempt from VAT. Income from property is determined by the way the structure (building) is treated and whether or not the owner/purchaser decides to tax it. However, holiday rental income is subject to VAT.

   While the majority of individuals who own one or two holiday lets are unlikely to consider VAT issues, if their annual revenue from holiday lettings exceeds the VAT registration threshold of £85,000, they must register and charge VAT on their rents, paying it to HMRC quarterly. While this may increase their rents, it will enable them to claim back VAT on any expenditures incurred in connection with the letting.

Conclusion

You’re undoubtedly already aware that tax laws have been changed — for example, you can no longer deduct losses from other income but can deduct losses from a future holiday let income. That is why it is always a good decision to seek professional advice.

For additional information on the tax benefits and allowances available for your own holiday let business, as well as a more accurate estimate of your projected profits, we always recommend consulting with a certified, professional accountant.

In case you have any queries or want specialist advice on "Tax implications of holiday lets", kindly call dns on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Disclaimer :- "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.