Tax Benefits of Furnished Holiday Lets (FHLs)

simon

Simon Misiewicz

10th June 2020

What is a Furnished Holiday Lets (FHL)?

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

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

Furnished Holiday Let HMRC conditions to be met

There are conditions that must be met for a property to qualify as an FHL as shown on the above HMRC help sheet 253.  Please find below a summary of the key points:

– Your property must be available for letting as furnished holiday accommodation of 31 days or less per letting for at least 210 days in the year.  You are not able to count any days when you stay in the property since HM Revenue and Customs (HMRC) don’t consider the property to be available for letting while you’re staying there.

– You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year. Don’t count any days when you let the property 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 property on lets of longer than 31 days for more than 155 days during the year.

– The furniture and furnishings must be provided with the property and must be sufficient to enable the property to be occupied as holiday accommodation

– The property/ies must be let on a commercial basis with a view to the realisation of profits.

 

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Tax Benefits Of FHLs

Holiday lets and Stamp Duty Land Tax

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 which has bathing facilities, telephone lines etc. installed in each room and is available all year round would be considered non-residential,  in line with s.116(3)(f) which states that “a hotel or inn or similar establishment” is not used a dwelling.

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

Your property would be deemed to be mixed use if your holiday let, guest house etc has 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.

Stamp Duty Land Tax Calculator – £9.95

This SDLT calculator will tell you how much is to pay and how to reduce it further.




 

FHLs and pension Contributions 

Unlike most residential property investments where you can only make pension contributions up to £3600 per tax year, you can obtain tax relief for pension contributions on the equivalent value of profits made on your furnished holiday lets.  You can see more on this here.  This means that if your only income is your personal property portfolio, no matter what profits it makes, if it is not an FHL business, you can only contribute personally up to £3600 to your pension each year.  If you compare this to an FHL business in your personal name, your pension contributions can be up to £40,000 assuming your FHL profits are £40,000 or above.

FHLs and capital allowances to reduce taxable profits

Where a property meets HS253 conditions you can claim capital allowances. These allowances are for fixtures/fittings (eg items including furniture, equipment, fixtures, wiring, plumbing and heating installation equipment). Capital allowances can be applied to the profits of the business. This in turn brings down the amount of tax you will pay.

Capital allowances are mainly only available on commercial property and furnished holiday lets.  Typically such allowances can be 25% of the property cost. This % figure varies considerably according to the property type.

You will most likely require a specialist survey report to be completed to establish what the capital allowances are you can claim.

A capital allowance will not be available where you have already claimed (for example under repair or replacement) for the item in question that is available to you once your property is a FHL as a capital allowance (ie you can only claim the cost of fittings and fixtures once for tax benefit).

FHLs and Section 24 mortgage interest relief cap

We wrote an article about Section 24 mortgage interest relief cap. We also explored the many ways in which 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%.

Furnished Holiday Lets and Value Added Tax (VAT)

Once you reach an income level of £85,000 on holiday let/serviced accommodation then you need to register for VAT. This brings about your very first issue.

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 are unable to 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 work out what you can afford to absorb of the VAT bill. For example you may charge £100 per night in your property but the cost of running it is £70. If you absorb the full 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 as to what VAT you absorb and what VAT you pass onto your clients.

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