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Helpful Holidays holiday home tax guide

Are you looking for important information about holiday home tax and all things in between? Steve York, Tax Director at PKF Francis Clark chartered accountants highlights the tax implications and benefits of owning a holiday home, how to run a Furnished Holiday Let (FHL) and things to consider if you are thinking of selling your holiday home.

Tax is not always at the forefront of somebody’s mind when considering buying a second home. However, there are a number of tax implications of buying, running and selling a holiday let.

Here’s an overview of the key holiday home tax points, including the key benefits if your property qualifies as a Furnished Holiday Let.

Holiday Home Tax Advice

Read our complete guide, detailing everything you need to know about holiday home tax advice, or use the quick links to navigate to a particular topic.

Buying a Holiday Home

holiday home tax guide - cottage

The first tax you are likely to experience is Stamp Duty Land Tax (SDLT). If you are buying as an individual and you or your spouse own other residential property, then residential rates of SDLT will apply, enhanced by a 3% surcharge. If one of the purchasers is a non-UK resident there may also be a further 2% surcharge.

Specialist advice should be sought if you are purchasing more than one dwelling as part of the transaction. An example is if you are buying a home with a holiday cottage attached, or more than one holiday cottage in the same transaction. It may also be relevant if the property you are buying is not entirely residential – perhaps including farmland or a shop.

If a property you are buying qualifies as a Furnished Holiday Let, consider the value of the fixtures, fittings, furnishings and integral features within the property. Integral features include items such as water systems and heating systems. You can claim capital allowances on these, which reduce your holiday letting taxable profits.

If the property has been let previously as a qualifying Furnished Holiday Let then you will need to agree with the seller on the value of these particular elements within two years of purchase. If it has not previously been let as an FHL then you should obtain written confirmation from the seller of that fact.

From the outset, it is important to decide how you are going to operate your FHL business. The tax implications may be different depending on whether you are operating as:

  • Individuals, either in sole names or in joint names
  • A partnership
  • Through a limited company

Getting this right from the start can prove beneficial in the long term, as is often harder to change at a later date.

Running a Furnished Holiday Let (FHL) Business

holiday home tax guide - helpful holidays cottage

To qualify, the property must meet the following criteria:

  • It must be available to let commercially to the public for at least 210 days a year
  • It must actually be let as such for 105 days a year
  • It must not be in the same occupation for more than 31 days in more than 155 days of the year

If the criteria is met in year one but despite best efforts does not reach the minimum occupancy at a later date, then it may be possible to make a period of grace election with HMRC, allowing the property to be treated as a qualifying FHL. The actual criteria must be met at least one in every three years for this election to be available.

Due to the covid pandemic and in particular the lockdown periods, the minimum total of let days per year was unachievable for many. However, HMRC has taken a pragmatic approach to this to date. Given the importance of the tests for the Furnished Holiday Let tax rules, you should take advice for the tax years affected – 2020/21 and 2021/22.

HMRC tax return for Furnished Holiday Lets

When letting a holiday home as a FHL, you will be required to report your profits to HMRC on a tax return. Yourprofits will be the rental income less a number of allowable costs.

Examples of allowable costs:

  • Agent fees
  • Mortgage interest
  • Advertising
  • Repairs
  • Accountancy fees
  • Business rates
  • Capital allowances

This is not an exhaustive list, and it may be possible to offset some of the costs you incur before you start letting as well.

It is important to note that if you received a covid-related grant in respect of your Furnished Holiday Let, then that is treated as part of your taxable income and must be declared in your return.

For more information head over to the HMRC to find out how to calculate your taxable profits.

Furnished Holiday Let tax return dates

holiday home tax guide - holiday home tax

If you are not already in the tax system, then you will need to register with HMRC by 5 October following the end of the tax year in which you start your business. You will have until 31 January in the following year to file the tax return (earlier if using paper filing). Visit the HMRC website for more on tax returns.

Your tax liabilities will be payable by 31st January. You may also need to make payments on account towards the following tax year, payable in January and July.

The first January following the start of a new business is likely to see a higher tax payment required – this being the balance for one year, plus the first payment on account for the following year. Capital allowances may mean that there may not be any taxable profits in the early years.

Vat on Furnished Holiday Lets

There are different rules if operating as a limited company. For larger FHL businesses where turnover is more than £85,000 per year, or you have reason to believe that it will reach that level, you may need to register for VAT.

This means that you will be able to reclaim VAT on your expenditure, but it also means you will need to charge VAT on your rental income.

New rules for small business rate relief

The furnished holiday let may be assessed to business rates, possibly then with the offset of small business rates relief. The rules are set to change from April 2023. A property will be assessed for business rates, rather than council tax, if the owner can provide evidence that on the day of assessment for business rates:

  1. It will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the year after the day in question
  2. During the previous year it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days
  3. During the previous year, it was let commercially, as self-catering accommodation, for short periods totalling at least 70 days

Selling Your Holiday Home | Tax Considerations

holiday home tax guide - Bigbury holiday cottage

Hopefully, by the time you sell, the property will have increased in value. A capital gain will then arise, which is taxable. Ordinarily an individual will have an annual exemption to offset against the capital gain of just over £12,300 per owner.

One of the benefits of qualifying as a Furnished Holiday Let is that capital gain can be taxed at 10%. But this is only if it qualifies for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).

There is a lifetime limit on assets that qualify for Business Asset Disposal Relief (BADR) of £1M. If the property is not a qualifying FHL the gain is taxed at up to 28%.

Sometimes families may wish to pass on holiday cottages to the next generation. This is treated as a disposal for capital gains tax purposes; HMRC will treat this as though you have sold it at open market value.

For non-FHLs this would trigger a capital gains tax charge, but another benefit of a FHL is that gifts can be made with the ability to hold-over the capital gain – meaning that the gift is not subject to immediate capital gains tax.

When you cease to let the property as a qualifying FHL there may be a claw-back of previously claimed capital allowances.

If sadly a FHL owner dies, there are usually no specific reliefs from inheritance tax for many holiday let businesses, though some may attract business property relief in limited circumstances.

Tax Benefits of Owning a Holiday Home

holiday home tax guide - Challaborough holiday cottage

The benefits of letting as a Furnished Holiday Let (FHL) over Non-Furnished Holiday Let (non-FHL) rentals include:

  • The ability to claim capital allowances
  • The ability to hold over capital gains on a gift to the family
  • The potential to achieve BADR on sale – a 10% tax rate rather than 28%
  • Sale proceeds can be rolled over into a new FHL, or other business, and attract relief from capital gains tax
  • If you have borrowing costs to fund the purchase of the holiday let, the interest can be offset in full against the letting profits. If you have a normal buy to let business that does not qualify for FHLs then the interest relief is restricted
  • FHL profits count as earnings for pension contributions purposes

Expert Tax Advice from PKF Francis Clark

Tax can be a complex subject and differs per individual case, so we always recommend you seek professional advice.

Steve York is Tax Director at PKF Francis Clark, chartered accountants and business advisers. If you would like to contact Steve York for your own tailored tax advice, then please get in touch here.

Let Your Cottage with Helpful Holidays

holiday home tax guide - holiday home

Helpful Holidays have 37 years’ experience in managing Furnished Holiday Lets in the South West.  Our team know a thing or two about helping you get the most from your holiday property, so we invite you to read more holiday home owner information, tips and advice.

We take the hassle out of holiday letting so you can reap the rewards while ensuring your holiday letting journey is profitable and most of all, enjoyable.

Find out more about letting with Helpful Holidays, request your FREE owners guide today.

Tax can be a complex subject and often turns on the facts of an individual set of circumstances so you should take specific advice. There are additional tax rules for non-UK residents buying and owning holiday homes in some cases. The rules often change and whilst the contents of this blog are correct at the time of writing in July 2022, you should check that the rules have not changed if you are reading this at a later date.