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Taxes on Accommodation Units

If you are an employee and you stay at an accommodation that your employer has provided for you, you have to pay taxes on it.

When it comes to taxation, there is a fundamental difference between the way HM Revenue & Customs (HMRC) treats holiday accommodation and standard rental properties.

Having your property treated as a trade business, rather than a rental property, carries a number of advantages.

Taxes on accommodation units

Living accommodation includes houses, flats, houseboats, holiday homes and apartments. It doesn’t include hotel rooms or board and lodgings, for example, where you have to eat out or do your laundry elsewhere.

Rental and Trade Businesses

As mentioned in the above paragraph, holiday accommodation and standard rental properties are treated entirely in a different manner by HM Revenue & Customs (HMRC).

Properties classified as trade businesses receive a lot of tax exemptions by HMRC.

  • Hotels, guesthouses and B&Bs are treated as trade businesses.
  • Self-catering accommodation can be treated as a trade business provided that the conditions of the ‘Furnished Holiday Letting Rules’ are met.

To comply with the Furnished Holiday Letting (FHL) Rules a property must be available for at least 210 days a year, let for at least 105 days and operated in a commercial manner.

Furnished Holiday Letting Rules (FHL)

In order for your self-catering property to qualify as a trade business the following conditions need to be met:

  • Commercial operation: The business must be carried out for the purpose of earning or making a profit.
  • Pattern of occupation: Total periods of longer term occupation must not exceed 155 days (approx. five months) during the relevant period. A period of longer term occupation is a letting to the same person for longer than 31 continuous days.
  • Availability: The property must be available for commercial letting as holiday accommodation to the public for a period not less than 201(approx 7 months) during the relevant period.
  • Letting: The property must be available for commercial letting as holiday accommodation to the public for a period not less than 105 days during the relevant period. A letting for a period of longer term occupation is not a letting as holiday accommodation for the purposes of this condition.

Benefits and advantages of a property classified as Trade Business.

Having your property treated as a trade business carries the following advantages:

It ensures that income, net of allowable expenses, is treated as earned income. This means that losses can be offset against other income (Note: this does not apply to self-catering properties) and capital allowances can be claimed in respect of all furniture and equipment used in the business.

This compares favourably with the treatment of rental properties, where losses can only be offset against future income and you cannot claim capital allowances in respect to any new furniture and equipment.

Trade businesses are treated as a business asset for the purposes of determining Capital Gains Tax, which gives you far greater allowances than you get for rental properties.

For Inheritance Tax purposes, the property is deemed to be a business asset and can be passed on tax free.

Note:

HMRC was recently successful in challenging the inheritance tax exemption of a self-catering property by arguing the level of service provided to guests was not sufficient for it to be deemed a trading business for the purposes of Inheritance Tax. You should therefore seek professional advice as to whether your property is exempt from Inheritance Tax.

Accommodation you pay tax on

You’ll pay tax on your living accommodation regardless of the amount of income that you receive, unless you fulfil certain criteria that allow you to be exempted from taxation.

Accommodation you don’t pay tax on

You don’t have to pay tax on your living accommodation if you fulfil below mentioned criteria:

You cannot carry out your job properly in absence of accommodation.

Your job requires a suitable accommodation in whose absence you will fail to discharge your duty in a proper manner.

The nature of your job is such that it requires special security and you do not feel safe in absence of proper accommodation.

Some of the important jobs or professions that necessitate having an accommodation are as following:

  • Agricultural workers living on farms or estate
  • Gatekeepers in charge of level-crossing and lock-gate
  • Officers, chaplains and prisoner governors
  • Managers of newspaper shops that have paper rounds only
  • Pub and off-license managers who living on their premises
  • Ministry of Defence police, people employed in Diplomatic service and members of Her Majesty forces
  • Stewards and green-keepers living in their premises
  • Clergymen and ministers of religion. The rule is not applicable though if they are only engaged in administrative duties.
  • Vets who live in area where they may have to take emergency calls
  • Stable staff and key members of racehorse trainers whose nature of job require them to be close to stables
  • Managers of camping and caravan sites living on, or near to, the premises who may be required to respond to emergency calls
  • Boarding school head teachers and other teachers with pastoral responsibilities that demand duties beyond normal school hours
  • Resident caretakers and wardens of sheltered housing who live on the premises and who are on duty 24 hours.

How to work out the lease premium

If your employer leases the property you live in, and they pay a lease premium as part of that lease, the tax you pay on the benefit of this accommodation may include an amount for the lease premium as well as the rent.

This will happen if the lease on the property is for 10 years or less and it began (or was extended) on or after 22 April 2009. The lease is calculated as A/B x C where:

A is the number of days in the tax year in which the accommodation is provided by the employer

  • B is the term of the lease in days, and takes into account leap years as well
  • C is the total amount of lease premium paid by the employer
  • The above arrangement can be best explained with the help of an example.

Suppose On 1 October 2017, your employer leases a property and you get a rent free accommodation on that property as an employee. The lease is for 5 years without a break clause. Your employer pays rent of £120 a year and a premium of £70,000.

For the tax year 2017 to 2018:

  • A is 187 days (1 October 2017 to 5 April 2018)
  • B is 1,826 days
  • C is £70,000

The amount of lease premium to be attributed will be A ÷ B × C = £7,168.

Advice

It is, however, important to note that taxation is complex, more so if it relates to holiday accommodation. Common people often experience a lot of trouble grasping the matter. It is therefore strongly recommended that you seek advice from a professional tax consultant on the most efficient way to set up and operate your business.

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