Posted 18 January 2011 by Andrew Gardner
Furnished Holiday Lettings or should we say owning ‘that glorious Sussex holiday cottage home’ are an area of entrepreneurial potential and should be of interest to many.
The Coalition Government has been keen not to abolish the rules that apply to furnished holiday lets, due to disappear under the outgoing administration, and following a consultation period are preserving many of the advantageous rules for holiday property owners. These are seen to encourage tourism and therefore help with prosperity and employment in holiday areas.
Investors are aware of the income and potential for capital growth opportunities behind buy to let property arrangements, however less is generally understood about furnished holiday lets and the return that can be generated to owners who rent their property through tourism.
It is estimated that 65,000* individuals nationally own second homes that they run as a furnished holiday let business. Don’t think that self catering accommodation has to be beside the sea in order to attract visitors. Many of the tourist hotspots are often busy towns or cities. An apartment or cottage in Chichester, Arundel, Lewes or Battle can often command rental income throughout the year due to their popularity, while our more temperate climate in Sussex means that areas around the South Downs are also popular outside of the main summer season.
Holiday letting qualifies for certain tax treatments available to businesses. It is still essentially regarded as income from property by Her Majesty’s Revenue & Customs (HMRC) but unlike other forms of property letting which HMRC class as investment income it benefits from more favourable tax relief.
There are some valuable tax incentives for letting your property as a holiday home, but there are some exacting HMRC rules which you must follow:
- Your accommodation must be available for letting to the public for at least 140 days of the year and actual letting must be at least 70 days. It is proposed by the government this will increase to 210 days availability and 105 days actual letting achieved from April 2012 onwards following draft legislation that will be enacted in the 2011 Finance Bill.
- The holiday property must not be let to the same person for more than 31 days in the year during the holiday letting period. Outside the holiday letting period longer term occupation must not exceed 155 days in a tax year.
- The business must be carried on commercially, and with a view to making a profit.
- You cannot claim the tax incentives when you use the accommodation yourself, or when the property is not available for letting.
- The property must be fully furnished.
- The lettings must be at full market rent, not a peppercorn rent for friends and relatives.
- Your rental income is subject to income tax, but ALL expenses are allowable.
Many people have been keen to ensure that their rental property came within the furnished holiday lettings (FHL) regime in order to secure the advantageous tax breaks. So what are they?
1. Any capital gains made on FHL qualifying properties will qualify for the entrepreneurs’ relief provided certain conditions are met. This means the gain will be liable to capital gains tax at the rate of 10%, rather than normal capital gains tax rates of 18% or 28%. Entrepreneurs’ relief is available on gains up to a lifetime limit which is £5 million.
2. Capital gains tax can be deferred where the proceeds of the sale are invested in another holiday letting property within three years. This is known as roll-over relief. Roll-over relief can also be used to defer paying capital gains tax on sales of other types of businesses, where the proceeds are invested into a qualifying holiday lettings business.
3. Capital allowances can be claimed in respect of expenditure incurred on furniture and equipment such as white goods used in a furnished holiday let, unlike non FHL furnished rental accommodation where only a 10% deduction for wear and tear is available.
4. Allowable expenses that can be claimed against FHL business income include the following: legal and letting agent fees, accountancy fees, cleaning costs, decorating and maintenance costs, heating and lighting costs, insurance costs, mortgage interest payments and travelling expenses to visit the property.
5. Pension contributions can be made against the profit generated from a FHL business. It is treated as relevant UK earnings by HMRC and so is pensionable.
It is important that individuals always take professional financial advice before considering whether to operate under the furnished holiday let rules. It will not suit everyone since there are owners of second homes who purchased them for their own enjoyment during the year. The requirement to make it available for letting for 140 days and then 210 days from April 2012 may simply not fit with their requirements for the property.
However, many of these owners are increasingly looking to accept holiday lets around the periods when they are not there themselves. We work with a number of owners where this is the case and it generates them valuable additional income even though they are not operating within the furnished holiday letting rules.
Anyone who is considering purchasing a second property as an investment opportunity should always give furnished holiday lets serious consideration. An apartment or cottage in Chichester, Arundel or Eastbourne for example could command upwards of £750 per week in the high season. Owners who live close to their properties often derive great satisfaction from meeting the guests who visit, and enjoy reading the guest book comments that have been left after their stay.
The workload of course is greater when compared to conventional buy to let arrangements, and there is no guarantee to the number of bookings that will occur each year. however whether handling changeovers and meeting guests yourself, or employing a housekeeper to handle that for you, the financial rewards from operating within the FHL rules can be excellent.
Take a look at the self catering holiday accommodation we offer to see the type of apartments and holiday cottages available.
* The number of individuals who recorded furnished holiday let income within their self assessments in the year 2008/9.