Are furnished holiday lets tax efficient? | Tax Advantages

Are furnished holiday lets tax efficient?

Are holiday lets tax efficient?

Owning and renting out a vacation home can be considered a very profitable investment and a great source of income. You not only have a vacation cottage where you can spend a few weeks each year. It can also be an investment asset covering costs and extras.

Understanding the complexities and specifics of Furnished Holiday Lets tax can be financially beneficial, allowing owners to take advantage of special tax breaks.

Holiday lets come with several tax advantages, including lower capital gains tax, allowances for property items, and the ability to claim back various expenses, making them a smart financial choice.

Since we know that comprehending the tax implications of vacation rentals might be challenging, we have created an extensive guide. This includes everything you need to know about Furnished Holiday Let tax and a thorough analysis of the benefits, drawbacks, and tax benefits of renting out your vacation house.

At Cloudco Group, we are experts in property tax and offer accounting advice to buy-to-let landlords. Get in touch with us today.

What is a furnished holiday let (FHL)?

Unlike a residential let, a furnished holiday let is a tenancy that only allows the renter to stay in a fully furnished, self-catering holiday property for a limited time. Some mortgage lenders will limit this time to as little as 31 days. This is also a requirement of the furnished holiday letting tax legislation.

It is because furnished holiday lets are essentially short-term rental units furnished to a degree that permits tenants to move in with only their things. Instead of long-term residential rentals, furnished holiday lets are usually better fitted to accommodate visitors’ short-term needs.

Holiday lets must meet three basic requirements to get the basic rate tax relief benefits. These are listed in the following order:

  • The property must be actively represented as being offered for commercial holiday leasing to guests and holidaymakers for at least 210 days (30 weeks) per year.
  • If the furnished holiday let is rented to the same individual for more than 31 days, this “long-term” occupation should not exceed 155 days (22 weeks) annually. The property must be rented out as vacation accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made available.
  • The property must be actively promoted as a commercial holiday for at least 210 days (30 weeks) per year. This amount does not account for your or your family’s time using the property.

What are the tax implications of letting your property out for holiday lets?

Renting out your property for a few days at a time means navigating tax benefits in a different tax environment. Instead of paying tax because of regular business rates on residential rentals, holiday lets have several tax benefits that can significantly improve your financial situation.

Tax advantages of holiday lets

Holiday lets are often more commercially risky than regular residential landlords’ lets, which is likely why they continue to qualify for the tax breaks taken away from other residential landlords elsewhere. They are more likely to be vacant for extended periods, resulting in less consistent income and more expenses.

There are more residents, which necessitates more marketing, more end-of-tenancy cleaning, more wear and tear, and the obligation to provide furniture, all of which eat into revenues.

These expenses are still tax deductible if they are entirely and solely related to the property’s potential rental income that tax year. Capital allowance tax relief and tax deductions are also available on investments in fixtures such as kitchens and furniture.

Here are the tax advantages of holiday lets:

Capital gains tax relief

The possible reduction in capital gains tax is one of the most alluring advantages. If you sell a property used as a furnished holiday let, you may qualify for Entrepreneur’s Relief, resulting in a reduced capital gains tax rate.

Capital allowances

Holiday lets make capital allowances available as well. This means you can also claim a capital allowance for tax relief on specific items within the property, such as furniture, fixtures, and equipment.

Holiday lets are a financially appealing alternative because you can depreciate these assets over time and lower your overall tax liability.

Tax Redeemable

You can claim capital allowances for your FHL property. This implies that you can exclude from your pre-tax profits the expense of outfitting your cottage to a luxurious standard, increasing your prospective rental income. Long-term rental properties do not have this option, claiming capital allowances.

Pension Contribution

Since the income from an FHL property is considered “relevant earnings,” you can contribute to a pension at a reduced tax rate.

CGT Benefits

When the time comes for you to sell your whole FHL property portfolio, you may be eligible for specific Capital Gains Tax (CGT) benefits. These include the following and are not available to long-term rental properties:

  • Relief for Entrepreneurs
  • Roll-over Relief
  • Hold-over Relief

Split Spouse Earnings

Earnings from long-term rentals would be split under the formal ownership split (for example, if you owned 50% of the rental property, you would divide 50% of the earnings). Suppose there is enough proof to back this up.

In that case, you can divide the profits from an FHL property according to each person’s beneficial interest in the property or the actual effort spent renting the property by the same person.

Relief from Mortgage Interest

The best part is that mortgage interest is completely tax deductible. Unlike other types of residential property rental, there is now a cap on how much you can claim relief full mortgage interest for.

What can you claim tax back on holiday lets?

There are many ways to get tax refunds on vacation rentals. Keeping thorough records of all your expenses, from furnishings and appliances to maintenance fees and energy bills, and more tax, is essential.

Being proactive may make the most of your possible tax savings. Although permitted costs differ by jurisdiction, typical components consist of:

  • Furnishing your vacation rental: The cost of appliances and furniture.
  • Maintenance expenses: the cost of repair, renovations and upkeep of the property.
  • Utilities: Gas, electricity, water, and other necessities are called utilities.
  • Insurance: The price of property insurance.
  • Management fees: Fees paid to property management firms are referred to as management fees.
  • Advertising: The price of promoting your vacation rental.

Is renting out a furnished holiday let worth it?

The issue shifts from profitability to overall financial efficiency when considering the tax benefits. While maintaining a furnished vacation rental involves work, the possible profit and tax advantages sometimes outweigh the difficulties.

Once you reach a certain income level, you may be required to VAT registered and pay the applicable rates. However, this only applies if your property generates more than £85,000 yearly.

If you are already VAT registered (as a person or for another of your businesses), your furnished vacation rental income may also be subject to VAT. The potential rise in tax payments here may result in a financial pinch, so it’s worth being informed of ahead of time. Furnished vacation rentals have great advantages but carry more significant commercial risks. The properties will probably be vacant for extended periods, resulting in inconsistent income.

The requirement to provide all furniture has an impact on overall revenues. Setting aside the administrative costs and regular business rates (though 100% exemption may be available depending on the size of the property), furnished holiday lettings can be a considerably more tax-efficient alternative to classic buy-to-let scenarios.

The calculated investment has the potential to bring about both immediate financial reward and long-term stability for property investors.

A furnished vacation rental’s value is determined by considering the following factors:

  • Rental Income Potential: Evaluate your location’s demand and possible rental income.
  • Operational costs: Consider the cost of upkeep, utilities, management fees, and other related expenses.
  • Personal Satisfaction: This might be a big non-financial gain if you like entertaining and socialising with new people.
  • Market Trends: Remain current on local visitor patterns and the demand for vacation rentals.

For property tax advice, contact Cloudco Group

It can be challenging to navigate the complex web of property taxation. Seeking professional accounting assistance and expert recommendations suited to your situation is a good decision. With a focus on property tax guidance, Cloudco Group can offer valuable insights to support your decision-making regarding your furnished vacation rental.

Conclusion

To sum up, holiday lets provide several tax benefits that make them attractive investments. The financial advantages are evident, including capital allowances and tax reductions from capital gains.

Even if there are obstacles to overcome, investing in furnished vacation rentals may be fulfilling due to the possible return on investment and the joy of entertaining guests.

To fully realise the potential of your vacation rental investment, get in touch with Cloudco Group if you’re looking for professional advice on property tax issues.

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CloudCo Group is a Chartered Management Accountancy Firm offering premium accounting services to a range of businesses and individuals.

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