The pandemic is said to bring a few behavioural changes. Working from home including “blended working” is one such example and letting out your property as a holiday let may be another one.
During the later part of 2021 many councils in the tourist areas of the country were experiencing significant rises is housing waiting lists as landlords opted to let their properties under Airbnb short lets.
The rise of Airbnb’s seems to have prompted Generation Rent activist group to campaign for harsher taxation of Airbnb because the current tax system incentivises landlords to let their properties to holiday makers rather than the local population.
The favourable tax rules apply to your property if it qualifies as a Furnished Holiday Let. So how do you know if you are letting out your property as a holiday let?
What is a Furnished Holiday Let (FHL)?
To qualify as a FHL, there are several conditions that must be met.
For starters HM Revenue & Customs (HMRC) classify FHL as a trade and so not the same as investment property let as a buy to let.
The property must be
- In the UK or EEA, fully furnished and commercially let.
- There must be sufficient furniture provided for proper enjoyment by the visitor
- Meet all three occupancy conditions as set out below
The 3 occupancy conditions
These conditions apply to the first 12 months of letting for new lets, or to the tax year (6 April – 5 April) for continuing lets.
1. The pattern of occupation condition
If the total of long-term lets (31+ days) exceeds 155 days in the year, then this condition is not met and the property will not qualify as an FHL.
The reasoning for the limit is to reduce the possibility of property owners accepting long-term lets and passing them off as holiday lets to access the tax benefits.
2. The availability condition
The property must be available for at least 210 days in the year to qualify as an FHL. This excludes any days that you or your family stayed at the property.
This rule was introduced to ensure that the property is genuinely available as a commercial let with the goal of earning a profit.
3. The letting condition
The final condition is that the property must be let as furnished holiday accommodation to the public for at least 105 days in the year. This does not include long-term lets of 31 days or more or days that you stayed at the property.
However, if your holiday let failed to attract 105 days of paying guests, there are 2 options to help you reach the threshold:
- The averaging election: if you have more than one property.
- Period of grace election: if your property reaches the threshold in some years but not in others.
The averaging election
If you have more than one holiday let, and one or more of these properties is not meeting the letting condition, you can use the average occupancy of all FHLs you let.
This is particularly useful if you have a high level of occupancy in one property but are struggling to achieve the occupancy level in a new property.
Period of grace election
If you genuinely intended to meet the letting condition but were unable to, you may be able to make a period of grace election that allows the property to qualify as an FHL as long as the other 2 conditions were met.
To make an election, you must have met the letting condition in the previous year or provide proof that you genuinely attempted to reach the threshold.
Full HMRC guidance can be found here
What are the advantages of a FHL?
As you can imagine only those properties that are genuine holiday lets qualify as a FHL. But why? The main reason being there are many tax advantages.
- You can claim full mortgage interest relief. Mortgage interest relief for other landlords is now restricted to 20% or lower depending on your personal circumstances.
- You can apportion profits to different partners depending on the beneficial interest and the amount of work done.
- The profit generated from your FHL qualify as “relevant” earnings for your pension contributions
- Capital allowances are available for any capital expenditure
- When you sell your property there will be some reliefs against any capital gains
Finally, as HMRC treats your FHL as a trade, if the rents go above £85K you will need register for VAT.
If you believe that your property is a FHL but you are not sure if you have received all the benefits, you may want to revisit this again.
Talk to us if in doubt. You can call or email normal manager but if you are not working with us visit us to see how we can help with your taxes