Furnished Holiday Lettings or should we say owning ‘that glorious holiday cottage’ in the South of England, are an area of entrepreneurial potential and should be of interest to many.
There are advantageous tax rules for holiday property owners who let their properties that encourage tourism and therefore help with prosperity and employment in the county.
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, cities or quaint rural villages. An apartment or cottage in Chichester or Winchester can often command rental income throughout the year due to the popularity of the area, while our more temperate climate across Sussex and East Hampshire makes the area also popular outside the main summer season.
Holiday letting qualifies for certain tax treatments available to businesses. It is still essentially regarded as taxable 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 210 days of the year and actual letting must be at least 105 days.
- 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 £10 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 replacement 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 210 days in the year 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. A cottage or country farmhouse for four in the heart of the Sussex countryside for example could command upwards of £700 per week in the high season.
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 the financial rewards from operating within the FHL rules can be excellent.
We act for many owners across Sussex and also in Kent in helping them to market their holiday properties.
If you have a property or are considering purchasing a property that fits the holiday home mould and would welcome an informal chat about your options, then please do ring me on 01798 877336, or you can reach me by email firstname.lastname@example.org.