Following the government’s decision to restrict mortgage interest tax relief for individuals acting as buy-to-let landlords, many would-be property investors have started looking into the potential of purchasing, or letting out existing properties, as furnished holiday accommodation. Leighton Reed, Director at MHA Broomfield Alexander, looks at the pros and cons of furnished holiday lettings from a tax perspective.
Firstly, to dispel a couple of myths about letting furnished holiday properties, they don’t have to be located in a seaside resort, or even a recognised holiday area to qualify. A furnished holiday let could be situated in any of the UK, aside from the Isle of Man or Channel Islands, or even in another country within the European Economic Area (EEA). We will wait to see what impact Brexit has on this situation.
Secondly, a furnished holiday letting can be operated through a company, but also by an individual, or a partnership, with tax on profits calculated through HMRC’s normal self-assessment process. In fact, some of the tax advantages on offer are only open to individuals and partnerships, and not companies.
So, what are the advantages of running a property as a furnished holiday let? Well, for a start, the restriction of mortgage interest relief for landlords offering long-term lets isn’t going to affect landlords of furnished holiday lets. So, at least for the time being, any interest on mortgage payments relating to the purchase of the property can be fully deducted from the profits, before any calculation of tax owed.
Capital allowances can be claimed for the cost of fittings and equipment installed or used within the property, as well as for the cost of equipment used for running the property a furnished holiday let. The profits a landlord receives from a holiday letting venture are treated by HMRC as earnings for pension contributions, so increased pension contributions can be made by the owner.
When the time comes to sell on the property, the owner is liable for Capital Gains Tax (CGT) but again, there are several tax relief schemes that can apply here. Entrepreneurs’ Relief means that any CGT is charged at a reduced rate, while claiming Rollover Relief means that any tax due can be deferred if the owner is re-investing in another business asset, such as a new property. There is also an option to apply for Holdover Relief, where the liability for CGT is transferred to the next owner of the property.
Usually, profit for tax purposes is split in the same way as ownership, so if you own 50% of a holiday property you would expect pay tax on 50% of any profit. However, there’s a bit more flexibility on furnished holiday lettings which means that profits can be split in different proportions.
So now for the small print. In order to qualify for the tax benefits outlined above, a furnished holiday property must be available for short-term letting (less than 31 days) on a commercial basis for at least 210 days during a tax year, and must be actually let for half of this time. It can be let to one tenant for longer than 31 days and still qualify, as long as these longer lettings don’t add up to more than 155 days of the relevant tax year.
If you let more than one property as a furnished holiday letting, you can average the days of short-term lettings across all your properties to determine whether the lettings conditions are met across your entire portfolio. To qualify for the CGT reliefs, the conditions need to be met in the 12 months prior to disposal of the property.
There are some other downsides to be aware of. Letting of all holiday accommodation is standard-rated for VAT purposes, whether or not it qualifies as a furnished holiday letting, so where the landlord is VAT-registered, 20% VAT must be added to the fees charged. The landlord must register for VAT when the total value of fees charged for holiday lettings plus the value of any other ‘VAT-able’ sales made exceeds £85,000 in any 12-month period.
Where a property in England is made available for letting on short-term lets for 140 days or more per year, it will be subject to business rates rather than council tax. If the property is in Wales, the corresponding figure is 70 days, and different rules apply to properties in Scotland or Northern Ireland, where small business rates relief may be available.
Where a furnished holiday letting property is used by the landlord’s family for no charge for a period of time, any capital allowances claimed in that tax year must take this into account. This should also be applied to the annual expenses for the property, such as local property taxes, energy and water charges. If the property is held by a company, it may be treated as a benefit in kind, which will need to be reported to HMRC under the P11d regime.
As a combination government policy and stricter lending criteria continues to put pressure on individual buy-to-let landlords, furnished holiday lets could become an interesting proposition. However, with a minimum of 105 days of commercial lettings required to realise the tax benefits, landlords will be wary of that golden rule of property investment…location, location, location.
This appeared as an article in the business pages of the Western Mail on 26 December 2018.