We asked Colin Johnson, Leisure and Tourism specialist at MHA Moore and Smalley, 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. Even though they are not actually trades, this has the benefit of being excluded from a class 4 national insurance charge.
In order for the property to qualify, the property must be:
Where the Furnished Holiday Let (FHL) is initially let out part way through a tax year the first 12 months 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.
Special provisions apply where the letting requirements are not met for a particular year.
This includes an averaging election, useful if some properties meet all three conditions but some fail the minimum days actually let condition.
There is also a provision for a period of grace, which can apply if all three conditions were met in a tax year, but despite genuine efforts, the following year the minimum days actually let condition was not met. This election can be made for 2 consecutive years.
For 2020/21 due to the coronavirus pandemic, some properties may not meet the letting condition of being let for 105 days in the tax year. The period of grace can be made where the conditions apply.
There's more information about the tax implications of coronavirus over on the MHA Moore and Smalley blog.
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.
Another positive outcome of the furnished holiday letting rules, is that the restrictions on residential finance costs relating to property businesses do not apply to a FHL business.
If a loss is created in a tax year (i.e. 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.
An extra 3% Stamp Duty Land Tax is applied when buying a second property or buy‐to‐let property.
As a result of the coronavirus pandemic, the government announced a temporary increase to the nil rate band on the purchase of residential properties made between 8 July 2020 and 30 June 2021. The temporary increase affects the nil rate band by increasing it from £125,000 to £500,000. From 1 July 2021 until the 30 September 2021, the nil rate band will be reduced to £250,000. Then from 1 October 2021, the nil rate band will revert to £125,000.
If you own, or part own, more than one residential property worth £40,000 or more, a 3% surcharge of SDLT will be charged on the purchase of a new property; this includes FHLs. The 3% higher rate for purchases of additional dwellings applies on top of revised standard rates for the period 8 July 2020 to 30 June 2021:
|
Property or lease premium or transfer value |
SDLT rate |
|
Up to £500,000 |
3% |
|
The next £425,000 (the portion from £500,001 to £925,000) |
8% |
|
The next £575,000 (the portion from £925,001 to £1.5 million) |
13% |
|
The remaining amount (the portion above £1.5 million) |
15% |
From 1 July 2021 until 30 September 2021, for those who already own, or part own, a residential property worth £40,000 or more, the rates applying are:
|
Property or lease premium or transfer value |
SDLT rate |
|
Up to £250,000 |
3% |
|
The next £675,000 (the portion from £250,001 to £925,000) |
8% |
|
The next £575,000 (the portion from £925,001 to £1,500,000) |
13% |
|
The remaining amount (the portion above £1.5 million) |
15% |
From 1 October 2021, for those who already own, or part own, a residential property worth £40,000 or more, the rates applying are:
|
Property or lease premium or transfer value |
SDLT rate |
|
Up to £125,000 |
3% |
|
The next £125,000 (the portion from £125,001 to £250,000) |
5% |
|
The next £675,000 (the portion from £250,001 to £925,000) |
8% |
|
The next £575,000 (the portion from £925,001 to £1,500,000) |
13% |
|
The remaining amount (the portion above £1.5 million) |
15% |
Both Scotland and Wales have their own devolved rules on land tax, Scotland’s being called Land and buildings transaction tax (LBTT), and Wales’ called land transaction tax (LTT).
Whilst the underlying rules applying to LBTT, LTT and SDLT are broadly similar in nature, the taxes are not identical. For instance, LTT’s nil rate band has been temporarily increased to £250,000 from £125,000 until 30 June 2021.
Normally, profits on disposal (i.e. 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 Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) which means that any chargeable gain is taxable at 10%, subject to certain qualifying conditions. The total Business Asset Disposal Relief claimable over a lifetime was reduced to £1m with effect from 11 March 2020.
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.
From 6 April 2020, HMRC introduced new rules on the reporting and paying of capital gains tax on the disposal of UK residential property. Generally, where there is a disposal within the scope of the capital gains tax UK property disposals compliance regime, there is a 30 day time limit to submit a capital gains tax UK property disposals return to HMRC. The 30 day timer starts from the date of completion of the disposal. There are some exceptions to the reporting rule, such as a no gain/ no loss disposal to a spouse.
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.
A big thank you to Colin at MHA Moore and Smalley for providing this helpful overview.
Information within this article is correct at date of writing 26/03/2021. This article is intended as an overview of tax essentials for holiday lets, and not as personal advice.
MHA Moore and Smalley provide accounting, business advisory and wealth management services. Visit their website >
Furnished Holiday Lettings Guidance from the HMRC >
Thinking of investing in a holiday let property? Check out our holiday let mortgages >