Things you need to know about furnished holiday lets

With great summer weather and travel disruptions, staycations have never been more popular. So, it’s not a shock to know that many landlords and the general public or considering investing in one or more furnished holiday lets (FHLs).

Before you rush out to buy a property and use it as a furnished holiday let, there are several things you need to know about Furnished Holiday Lets. For example, what qualifies as a furnished holiday let, differing rental profiles and the tax advantages that it may offer.

In this blog, I’ll cover all these things and more to give you a picture of the benefits of furnished holiday lettings to help you make yours more profitable. Read on to find out more.

What is a furnished holiday let?

A Furnished Holiday Let (FHL) is a type of rental property that only allows a tenant to occupy a fully furnished property that is self-catering for a limited period of time. A property must meet specific criteria in order to be classified as an FHL, including availability, actual bookings, and level of furnishings.

What properties count as furnished holiday lets?

To qualify as a FHL your property must be:

• in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway.
• furnished – there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.

The property must be commercially let (you must intend to make a profit). If you let the property out of season to cover costs but don’t make a profit, the letting will still be treated as commercial.

Occupancy conditions for FHL qualification

Accommodation can only qualify as a FHL if it passes all three occupancy conditions below:

The pattern of occupation condition

A property will NOT qualify as a furnished holiday letting if it is rented out for a period that exceeds 31 days at a time. The total timeframe of all lettings should not be more than 155 days in the tax year.

The availability condition

The property must be available for holiday letting for at least 210 days in the tax year. Do not count any days when you’re staying in the property.

The letting Condition

You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year. You can’t count days when you let the property to people you know at zero or reduced rates. You also can’t count longer-term lets of more than 31 days (unless it’s for unforeseen circumstances).

If you do not let your property for at least 105 days, you have 2 options (known as elections) that can help you reach the occupancy threshold:

• the averaging election – if you’ve more than one property.
• a period of grace election – if your property reaches the occupancy threshold in some years but not in others.

Averaging Election

If you let more than one property as a furnished holiday let, and one or more of these properties doesn’t meet the letting condition, you can elect to apply the condition to the average rate of occupancy for all of your FHL properties.

Period of Grace Election

The second way the condition can be classed as met is by making a period of grace election,

To make an election, you must be able to show that you had a genuine intention to let the property in the year. For example, you may have marketed a property as per previous successful years and lettings are cancelled due to unforeseen circumstances, like extreme or adverse weather.

In order for the election to be permitted, the letting condition must have been met in the previous year.

If the property does not meet the letting threshold after two consecutive periods of grace elections, it will no longer qualify as a furnished holiday let and the normal tax rules for rental businesses apply.

Advantages of a Furnished Holiday Lets

There are many tax advantages in classifying a holiday property as an FHL:

1. Finance cost restriction

   Unlike general residential property business, the mortgage interest or other finance costs are fully tax deductible in computing profits from an FHL business.

2. FURNISHING THE PROPERTY CAN BE TAX REDEEMABLE VIA Capital Allowances

   FHL’s qualify for Capital allowances. This means the cost of your furniture and other fixture and fittings can be offset against your pre-tax profits to reduce overall tax liability.

3. Business Asset Disposal Relief (BADR)

   When you come to sell your FHL property, you are able to claim certain Capital Gains Tax (CGT) reliefs. BADR applies where the gains will be subject to 10% tax as opposed to the 18% or 28% that applies to other residential lets.

4. MAKE Pension Contributions

   As FHL is considered a trading activity. So, income generated from an FHL is classed as ‘relevant earnings’ – meaning you benefit from the ability to make tax-advantaged pension contributions.

5. Split the profits between your husband/wife

   With long-term rental properties, profits would be distributed according to the official ownership split. For example, if you own 50% of the property, you would share 50% of the profit. With an FHL property, you can apportion the profit to people based on the actual work done in letting the property, if you provide sufficient evidence to support this.

6. Mortgage Interest Relief

   Another bonus is that mortgage interest is fully deductible. Unlike other residential property letting, which has restrictions on how much you can claim relief for.

To benefit from these advantages, you should treat furnished holiday lets and their profits separately from other property lets.

Disadvantages of a furnished holiday lettings

1. Administration

   Running an FHL will have more work, as you will need to monitor the number of days it has been let to meet the letting condition. Further time may be spent in finding suitable tenants and advertising costs.

2. VAT

   Residential lets are exempt from VAT, but since FHL is considered as holiday accommodation, you will be required to register for VAT if the turnover breaches the current VAT threshold of £85,000. This will also mean that you can claim back VAT on the expenses incurred for your FHL business.

3. Losses

   Similar to other rental businesses, the losses from FHL can only be offset against future profits from the same business. Also, you cannot offset the losses of your UK FHL business from EEA FHL business, as they will be regarded as separate businesses.

4. Business Rates

   The property may attract business rates as opposed to council tax if let out for more than 140 days a year.

5. income consistency

   Unlike longer term rental properties, there may well be more fluctuation in your income with a FHL. This means there is more commercial risk with a FHL with potential inconsistency of income.

Summary

Like all rental of property there are pros and cons. Deciding whether to opt for longer term letting or a furnished holiday let, you’ll need to weigh up all of these. However, there are some clear tax advantages to an FHL.

For more help and specialist advice from our property tax experts on Furnished Holiday Lettings, call us on 03300 886 686, or send us an e-mail at enquiry@dnsaccountants.co.uk.

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.