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