Oh I do like to be beside the seaside…

Are you thinking of buying a property to rent out as a holiday home?  Because if you are, the taxman treats holiday homes quite differently to standard buy-to-lets.

If your property qualifies as a Furnished Holiday Letting (FHL) there are special tax rules for the rental income you receive e.g. claiming Income Tax relief on expenditure such as furniture and equipment.  If you decide to sell the property, you will also be able claim certain Capital Gains Tax reliefs such as Entrepreneurs’ Relief that are normally only available to “trades”.

Unlike rental income from a normal residential property, the profits are included in your ‘net relevant earnings’ which sets the amount you can pay into a personal pension.

For this reason, accounts and records for FHLs must be kept separately from other rental income and, if you have FHLs in and outside the UK, the form two businesses and each must have its own set of accounts.  If you have losses from either business, they can be carried forwards against future gains from the same business but they cannot be set against each other.

To qualify as a FHL the property must be located in the UK or in the European Economic Area and you must provide sufficient furniture for normal occupation – beds, wardrobes, sofas, tables, chairs, white goods, crockery and utensils.  Quite a few owners of holiday homes like to close off an area for their personal possessions; that is fine provided the rest of the property has everything that your guests need.  You also won’t get tax relief on anything that is not provided for your guests.

You must let the property commercially i.e. you intend to make a profit but if, for example, you charge less out of season, meaning that you just cover your costs, the letting will still be treated as commercial.

What differentiates an FHL from a regular let is the way in which it is occupied. There are special rules in the year you buy and sell the FHL but normally the rules are applied to each tax year (6th April to 5th April).

Pattern: the total of all individual lettings that exceed 31 days must not be more than 155 days.

Availability: the property must be available as an FHL for at least 210 days.

Business: the property must be let commercially for at least 105 days – days when you allow friends and family use the property for free or at ‘mates’ rates’ do not count towards the 105 day limit.  You must also exclude days when guests have been in the FHL for more than 31 days unless it’s because something unforeseen happens (illness, delayed flights).

If your property is only used as an FHL and is closed for part of the year because there are no customers, you can deduct all the allowable expenses, such as insurance and loan interest, provided you don’t live in the property.

If you let part of the property as an FHL, or where you use the property privately for part of the year, you will need to apportion your receipts and expenses on a reasonable basis

All owners then need to file a tax return and pay income tax on their share of the profit.

 

We help a lot of clients who have rental income so please get in touch if you are thinking of buying a property or have one already and would like some advice from a qualified professional.

 

The information provided is general guidance and does not constitute advice. If you require advice, you should contact a qualified taxation professional.

About the Author
Carolyn Burchell trained with the UK’s top firm of accountants, qualifying as a Chartered Accountant in 1996. Carolyn moved into industry in 1997 working on a number of commercial projects and managing Treasury and Credit functions before taking a career break to have a family. In 2009, Carolyn decided to enter into the stringent Chartered Institute of Taxation examination programme, qualifying as a Chartered Tax Adviser in 2012.

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