If you own a holiday home, you can enjoy it whenever you like and rent it out to short and long-term guests when you are not occupying it. Many people do this using Airbnb, which makes it easy to find people interested in staying in your property so that it does not sit unoccupied. If you live in the UK and want to rent a furnished holiday home, you should know that HMRC has several tax laws that will affect you, as UpperKey explains.
Understanding What a Furnished Holiday
A furnished holiday let (FHL) is a holiday property that is let to strangers so its owner can make a profit. The government classifies a furnished holiday let as a “trade”, meaning it has additional tax considerations compared to residential and commercial properties.
For a home to be considered an FHL, it has to meet certain criteria. First, it must be within the UK or the European Economic Area. The European Economic Area consists of several countries, including all countries that are a part of the European Union.
Second., it has to be furnished. While the FHL HMRC tax laws and other laws and regulations do not specify to what extent you need to furnish the home, it should have enough furnishings to enable someone to stay in it comfortably. If you are unsure what to include to ensure your property qualifies as an FHL, you can talk to a letting agency so they can advise you.
Third, you must have the intention to make a profit from letting the property. The regulations state that it is not a strict requirement that you have physical profit from the property, but you should intend to make a profit. You can prove this easily by having a business plan or working with a letting agency to make the property available to those who need a holiday home to stay in.
Lastly, the property must be available to let. To get started, you must make the property available for a whole year to pass the threshold. In that period, the furnished holiday let must be available for at least 210 days and be let for at least 105 days.
Also, you will not pass the threshold if you are just renting out to friends and family as it needs to be let to holidaymakers and tourists. All rental agreements should be less than 31 days. If the same person occupies the property longer, they should not do so for more than 155 consecutive days.
Taxes That Apply to Furnished Holiday Let
Since there are special furnished holiday let HMRC rules and reliefs, owning such property is more tax-efficient than owning other commercial properties. Unless you are operating your property through a registered company or Airbnb property management company like UpperKey, you must record the profits and losses yourself. Property owners can do this through the annual self-assessment process, as outlined on the UK government website.
Vat applies to furnished holiday lets that exceed the VAT threshold. The threshold is £85,000 over 52 weeks. If your FHL income exceeds this amount, you will need to register for VAT and then start paying HMRC VAT on the income. The good news is that you can claim back some of this VAT for related expenses.
You should also know that your property may be subject to VAT if you run other businesses and have already registered for VAT. The VAT rate varies, but it is now 20%, although it might get revised again in the future.
FHL owners are also required to pay income tax depending on their self-assessment as mentioned above. Any losses made on the property cannot be offset against other sources of income but are carried forward. By doing so, they help reduce the amount of tax you pay in the future since they reduce the amount of taxable income you report.
Business Rate Property Tax
Business Rates are taxes levied on businesses by local councils. They are typically used to pay for the various services the local council provides. If a property does not qualify for Business Rates, it is charged a council tax, which is similar to the tax levied on individuals.
In England, all self-catering accommodations, of which furnished holiday rates are a part, are charged Business Rates if they are available to rent for at least 140 days a year. Since FHLs are supposed to be let for at least 210 days a year to be classified as such, these regulations apply to them.
These regulations are different in Scotland and Wales, so you need to contact local authorities for more information.
If your property qualifies for Business Rates, you must register it with the local authority, which will calculate these rates. In doing so, they will consider the property’s size, type, location, and quality. It will also consider the level of income you expect from the property.
Small Business Rates Relief
Many furnished holiday let owners are eligible for a reduction of their Rates Bill. This reduction can be as much as 100% and it depends on the rateable value calculated for the FHL.
Reducing The Amount of Tax Paid on A Furnished Holiday Let
The best way to reduce the tax you pay on an FHL is by deducting eligible expenses. Remember that HMRC treats the expenses from the property the same way they treat those of businesses. Claiming eligible expenses allows property owners to deduct expenses from their revenue.
When doing this, property owners have to remember two things. First, all expenses must be related to commercial and not private use. For example, if you use the property for 4 months out of the year, only 66% of your expenses will be considered commercial.
Second, the expenditure should not be capital in nature. Capital expenses are things you buy for the property like furniture, equipment, and fixtures. However, property owners can claim capital allowances for additions like appliances, furnishings, carpets, plumbing and piping and other items bought and added to the property.
Examples of expenses property owners can claim include letting agency fees, utility bills, property insurance, loan interests, cleaning and maintenance.
Planning Permission and Additional Implications
It is crucial to understand if planning permission applies to your FHL. The rules and regulations governing this differ from one area to the next. For example, the Greater London Area has strict planning permission rules for FHLs, while other areas have more relaxed rules.
Property owners who want to lease their holiday homes or use them for Airbnb should understand the tax implications of doing so. Understanding these rules and the types of taxes that apply is key to planning your business and ensuring that you are turning a profit every year. It will also help you understand how to offset some of the tax you are required to pay.