Are you looking for important information about holiday home tax and all things in between? Matt Jeffery ATT CTA, Tax Director at Zeal Tax, 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.
How did the Spring 2024 Budget affect Furnished Holiday Lets?
On 6th March 2024, the Budget included an announcement that the Furnished Holiday Let tax regime would be removed from 1st April 2025. There will likely be a period of transition from that date. Technical guidance is due to be released shortly, which we’ll scrutinise alongside the legislation changes, and we’ll update this blog as soon as possible subsequently. As of April 2024, the tax regime in this blog is still in existence.
Buying a Holiday Home
You’ve decided to buy a holiday let, but are unsure of what taxes might apply. Here’s our rundown of the taxes you might encounter:
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is paid when you buy a property or land over a certain threshold in England and Northern Ireland.
You pay the SDLT when you meet the following criteria:
- You buy a freehold property
- You are buying a new or existing leasehold property
- You are buying a property through a shared ownership scheme
- You are transferring land or property in exchange for payment. (i.e. you take on a mortgage or buy a share in a house)
In Wales, this tax is known as Land Transaction Tax (LTT) and in Scotland, this is known as Land and Buildings Transaction Tax (LBTT).
According to the Gov website, the current SDLT thresholds are:
- £250,000 for residential properties
- £425,000 for first-time buyers purchasing a house worth £625,000 or less
- £150,000 for non-residential land and properties
Additional surcharges apply if you or your spouse own another residential property. This surcharge is an additional 3% on top of the standard SDLT. If you are a limited company you will also pay the surcharge, even if the purchase is the only residential property the company will own. If one of the purchasers is a non-UK resident then there may be a further 2% surcharge as well.
We suggest getting specialist advice if you are purchasing more than one dwelling as part of the transaction, the property you are buying is not entirely residential, or the property was previously used as a holiday let only or was uninhabitable when purchased.
Capital Allowances
If a property you are buying qualifies as a Furnished Holiday Let, consider the value of the embedded fixtures within the property. Embedded fixtures include items such as water, electrical and heating systems, kitchens, bathrooms, carpets etc.
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 the embedded fixtures within two years of purchase.
Claiming capital allowances on embedded fixtures requires the skills of surveyors and capital allowances specialists. For more information, download a guide from Zeal Tax HERE
Running a Furnished Holiday Let (FHL) Business
Who will be the Legal Owner
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 it is often harder to change at a later date. We would recommend seeking specialist advice to determine the best structure for your circumstances.
Qualifying as a Furnished Holiday Let (FHL) Business
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 the next year, then you can apply for 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 once in every three-year period for this election to be available.
There is also the ability to average the number of letting days if you have more than 1 holiday let property. For example, if one property only achieved 85 letting days but your other property had 130 days, the average would be 110 days, resulting in both properties qualifying as FHL’s.
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. Your profits 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.
For more information head over to the HMRC website to find out how to calculate your taxable profits or download Zeal Tax’s guide to allowable expenses for FHL.
Furnished Holiday Let Tax Return Dates
As with any business you will need to file a Self Assessment Tax Return. This must be done by 31 October if filing them by post and by 31st January if doing them online.
If it’s a brand new holiday let and you aren’t already in the tax system, you will need to register with HMRC by 5 October. Visit the HMRC website for more information on tax returns and self assessments.
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. However, capital allowances may mean that there aren’t any taxable profits in the early years.
VAT for Furnished Holiday Lets
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.
For more information on VAT for holiday lets, download Zeal Tax’s comprehensive guide.
Business Rates for FHLs
A qualifying FHL can be assessed for business rates rather than council tax. Whether you pay business rates depends on how many nights your holiday property is available to let each year and how many nights it was actually let.
According to the gov website, as of April 2023, if your property is in England, Scotland, and Northern Ireland, it will be rated as a self-catering property and valued for business rates if it meets the following criteria:
- 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
- During the last 12 months, it was let commercially, as self-catering accommodation, for short periods totalling at least 70 days.
This is different if your property is in Wales.
Please note that if your property is not business-rated, you may have to pay double or triple the standard Council tax rates.
You may also be eligible for small business rate relief if you let one property and its rateable value is less than £15,000. Check out the gov website on small business rate relief for more info.
For more information, read our blog about holiday home Council Tax.
Selling Your Holiday Home | Tax Considerations
If you decide to sell your holiday home, then you will need to pay Capital Gains Tax (CGT). The current CGT for residential properties is 18%, or 28% if you pay a higher rate of tax.
However, as an FHL is considered a business, the gains on the property may qualify for Business Asset Disposal Relief (formally known as Entrepreneurs’ Relief). If your property qualifies you will pay a reduced CGT of just 10%.
Sometimes families decide they want to gift the holiday let to the next generation. If you did this, it would be treated as a deemed disposal at market value for CGT purposes. However, you may qualify to ‘hold over’ the gain, meaning you freeze the capital gain until the property is eventually sold.
‘Roll-over’ relief may also be available if you intend to use the gains from the sale of your FHL to purchase a new one or reinvest it in another business. This type of relief allows you to defer paying capital gains tax until you sell the second property.
Note, if you gift a property with a mortgage debt of over £40,000, SDLT (or equivalent) would be payable.
Sadly, if the FHL owner dies, the holiday let will generally NOT qualify for Inheritance Tax (IHT) Relief. The value of the property will form part of the deceased taxable estate. The current rate of IHT is 40%.
Tax Benefits of Owning a Holiday Home
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 pay CGT at the 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
- Pension contributions can be made to reduce taxable FHL profits
- The profits of an FHL don’t have to be split equally between joint owners.
Tax can be a complex subject and differs per individual case, so we always recommend you seek professional advice.
Zeal Tax offers a free tax helpline for Helpful Holidays owners meaning you can get tax advice whenever you need it. You can contact Zeal on 01633 499771 or email sykesfamily@gozeal.co.uk or visit www.gozeal.co.uk/sykesfamily
Let Your Cottage with Helpful Holidays
Helpful Holidays have over 40 years’ experience in managing Furnished Holiday Lets in the South West. This means 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 homeowner information, tips and advice here.
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.
To find out more about letting with Helpful Holidays, request your FREE owner guide today.
Disclaimers:
The information contained in this article was accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time, so please contact our prospective new owner team if you’d like to hear how. Nothing in this article constitutes the giving of financial, tax or legal advice to you; please consult your own professional advisor (accountant, lawyer etc). in this regard.
If we have referred within the article to a third-party provider of unregulated holiday let mortgages, this is due to the fact that such mortgages aren’t currently regulated by the FCA.
As a helpful reminder, your home may be repossessed if you do not keep up repayments on a mortgage, so again anything you decide to do in this particular area this is one on which you should take your own professional advice on too, as we aren’t providing and can’t provide you with this.
