We asked the experts at Moore & Smalley, experts in holiday let tax, to highlight the key tax information you need to know if you’re running, or considering running, a holiday let business.
Properties which qualify as a ‘Furnished Holiday Let’ enjoy tax benefits over and above those of other residential and commercial lets as they are deemed to constitute a ‘trade’ in the eyes of HM Revenue & Customs.
In order for the property to qualify, the property must be:
● Let with view to making a profit;
● Available for letting for at least 210 days of the tax year;
● Actually let for at least 105 days of the tax year;
● Not occupied by long‐term tenants (ie those who stay for more than 31 days) for more
than 155 days of the tax year.
Where the Furnished Holiday Let (FHL) is initially let out part way through a tax year the first year needs to be considered to make sure the above requirements are met.
These rules apply to both UK FHL’s and those in the European Economic Area (EEA). The EEA comprises the member states of the European Union plus Iceland, Lichtenstein and Norway.
What if the requirements are not met?
Special provisions apply where the letting requirements are not met for a particular year.
One of the main benefits of FHL status is the ability to claim Capital Allowances on the purchase of qualifying items including any items ‘embedded’ in the property, such as lighting or air conditioning and fixtures and fittings.
If a loss is created in a tax year (ie allowable expenditure exceeds income) then the loss can be offset against profits from any other FHLs. Note that UK and EEA FHLs are treated as separate businesses for loss relief purposes. Losses cannot be offset against other sources of income such as salary or other rental profits.
Generally, the profit for tax purposes will be split in the same proportion as the ownership of the property, so if you own 50% of the property you are taxed on 50% of the profit. However, due to the activity being treated as a trade there is more flexibility so that profits can be split in different proportions which can be a useful tool for tax planning.
Buying the property
From 1 April 2016 there is an extra 3% Stamp Duty Land Tax when buying a second property or buy‐to‐let property.
Selling the property
Normally, profits on disposal (ie after the initial cost and legal and professional on sale and purchase are deducted from proceeds) are charged to Capital Gains Tax at 18% or 28% depending on your other income.
As a FHL property is treated as ‘trade’ for tax purposes it may be possible to claim
Entrepreneurs’ Relief which means that any chargeable gain is taxable at 10%, subject to certain qualifying conditions.
If the money from the sale is reinvested in another holiday letting it may be possible to defer the gain until the new property is sold. Also if the property is given away it may also be possible to‘hold over’ the gain until a future sale by the recipient.
If a capital loss arises it will be automatically offset against any other capital gains in the same tax year. Any unutilised losses are then carried forward and are available to offset against future capital gains.
The value of the FHL represent part of your estate for Inheritance Tax (IHT) purposes. There is a 100% relief for ‘business’ assets, but this is a contentious issue. We would recommend that advice is sought when buying, selling or renting out a property, and for IHT purposes, as there are a number of factors to consider.