Tax Benefits of Letting Furnished Holiday Lets (FHLs)

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

10th June 2020

What is a Furnished Holiday Lets (FHL)?

A furnished holiday let (FHL) is where people stay for a few nights or weeks. A residential buy to let is where someone stays in a house for a minimum of six months under an Assured Shorthold Tenancy agreement known as an AST.

Furnished holiday lets usually charge per night stay. This is different from a buy to let where you charge a monthly tenant. Someone staying in an FHL  would not be expected to pay the utility bills. This is in contrast to a single buy to let. Landlords can make more money from FHLs than single let property investments. The same investors can also save tax compared to those that invest in single lets.

Many landlords will use AirBnB and Booking.com, and other platforms to get bookings for their FHLs. Each is a simple platform where you last your property, and the guest will book and pay for their stay. It might be helpful to review the tips for AirBnB to get the most out of your investment.

 

HMRC furnished holiday letting tax rules & AirBnB Tax rules

Some Furnished holiday letting tax rules must be met to qualify as an FHL, as shown on HMRC help sheet 253. Please find below a summary of the key points:

– Your FHL must be available for letting as FHL of 31 days or less per letting for at least 210 days per year.

You cannot count any days when you stay in the FHL since HM Revenue and Customs (HMRC) don’t consider the FHL available for letting while you’re staying there.

– You must let the FHL commercially to the public for at least 105 days in the year. Don’t count days when you let the FHL to friends or relatives at zero or reduced rates, as this isn’t a commercial let. Don’t count longer-term lets of more than 31 days unless the 31 days is exceeded because something unforeseen happens.

– You must not let the FHL on lets of longer than 31 days for more than 155 days during the year according to the furnished holiday letting tax rules by HMRC

– The furniture and furnishings must be provided with the FHL.

– The FHL must be let commercially with a view to the realisation of profits.

Failing to adhere to the furnished holiday letting tax rules will result in the property being considered a traditional buy to let. This could mean dire results for landlords as they lose out on FHL capital allowances and will pay more money to HMRC due to the Section 24 mortgage interest relief cap.

Please work with your property accountant to work through the complex HMRC furnished holiday letting tax rules.

If you list your property on AirBnB or Booking.com, you should know that you also need to follow the Furnished Holiday Letting tax rules. AirBnB tax rules are the same as the above.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

 

Stamp duty on Furnished Holiday Lets (FHL) and AirBnB properties

You will pay stamp duty on furnished holiday let properties and AirBnB listings. SDLT and the 3% SDLT surcharge will apply to holiday lets and serviced accommodation as HMRC state that they are a dwelling.

HMRC explains where cases involving bed and breakfast establishments or guest houses will be treated on their merits. However, a bed and breakfast (B&B) establishment with bathing facilities, telephone lines etc., installed in each room (available all year round) would be considered a non-residential property. This is in line with s.116(3)(f) which states that “a hotel or inn or similar establishment” is not used as a dwelling.

The above also means that guest houses and B&B will not be subject to the 3% SDLT surcharge.

Your buy to let property would be deemed mixed-use if your holiday let, guest house, and AirBnB listing had an office where you keep paperwork. This means that the non-residential rates of SDLT would apply. The 3% SDLT surcharge would not be applicable.

UK landlords looking to invest into FHLs  will need to consider stamp duty. The SDLT rate applied to the majority of transactions will be set at the residential-use stamp duty.

Up to £125,000 Zero
From £125,001 to £250,000 2%
From £250,001 to £925,000 5%
From £925,001 to £1.5m 10%
Over £1.5m 12%

There are ways to minimise stamp duty on furnished holiday lets and you are advised to work with tax accountants to minimise tax wherever possible. Please note that the stamp duty paid is a capital cost. This will help you reduce your capital gains tax liability when the FHL is sold.

 

AirBnB tax & FHLs and Section 24 mortgage interest relief cap

We wrote an article about the Section 24 mortgage interest relief cap. We also explored how the Section 24 mortgage interest relief cap may be mitigated.

You can offset all the mortgage interest if you meet the HS253 conditions. Unlike buy to lets, where the amount of interest you can claim is now 0%.

Not only can you make more money on your Furbished Holiday lets using AiBnB, but you save tax too. It sounds like a no brainer, but there are many things you need to consider, such as the additional work involved. It is a balance between making money and spending more time in your rental business.

AirBnB & Furnished Holiday Lets and Value Added Tax (VAT)

Once you reach an income level of £85,000 on your FHLs, & AirBnB listings, you need to register for VAT. This brings your first issue of the more significant complexities of running your rental business.

Who pays your VAT bill? It is a good question. You could start to lose the competitive edge if you need to charge an extra 20%. This is especially the case if your clients cannot claim back VAT.   The alternative is that you absorb the 20% VAT charge. This means that you will not lose clients but will lose profit margin.

What are you to do? You will need to determine what you can afford to absorb the VAT bill. For example, you may charge £100 per night for your FHL, but the cost of running it is £70 if you absorb the total rate of 20% VAT to keep the price at £100. The money you will receive will be reduced to £83.33 after VAT.

This now gives you a nightly profit of £13.33 rather than the previous £30. This may not be sufficient, so you may decide to increase the price to the client to £110, including VAT. This means the money in your pocket of £91.67 is reduced from the original £100. This provides you with an improved profit compared to you attempting to absorb the VAT payment.

There will always be a compromise regarding what VAT you absorb and what VAT you pass on to your clients on your furnished holiday lettings and AirBnB listings.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

 

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