January is normally when so many of us start looking at our holiday plans for the year ahead. What better way to spend those cold dark evenings. A few of us even dream of having a holiday place that we can call our own. And why not? A place of our own in a familiar spot and one we can let out to fellow holiday makers when we are not using it. There are merits in owing a holiday let but the question is should you buy a holiday let and use it yourself?
The pandemic in 2020 meant that as travelling abroad became difficult and at best cumbersome, several of us cancelled our holidays plans to go abroad and instead chose a “staycation”. Since then, there has been a huge rise in Airbnb landlords who are taking advantage of the stay-at-home holiday market. The domestic holiday market is experiencing a boom which is set to continue during these uncertain times.
FHL including Airbnb
A Furnished Holiday Let (FHL) is a business and when it comes to the tax rules, they broadly follow those set for self-employment unless you are operating as a limited company (more on this later).
So far, FHL’s have managed to avoid the variety of inflicting measures enforced by the government on buy-to-let properties. From April 2017, the amount of mortgage interest that buy-to-let landlords can claim back started to reduce, however, those who own holiday homes can still claim the full amount.
A FHL also offers other benefits including Capital Gains Tax relief and capital allowances for furniture and fixtures. However, there are strict letting conditions. If you intend to stay in the property for part of the year, this could mean that the property no longer qualifies as a holiday let due to a minimum period reserved for paying guests.
Plus, don’t forget if your annual turnover from the holiday let exceeds £85,000, you will need to register for VAT.
What if you buy though a Company
In recent years many landlords have incorporated their letting business due to restrictions to mortgage interest. Maybe you are thinking of doing the same for the holiday let?
Remember you can still claim for the full interest on your loan if it is a true FHL.
But if you are already operating as a company the tax situation becomes a bit more complicated.
Benefit in Kind (BIK)
Benefits in kind (BIK) are benefits that directors or employees receive from their company that are not included in their salary. This may include property and living accommodation benefits.
If a company purchased a holiday let for its director(s), you should check how much tax you will need to pay and for how much of the year it applies.
This is best explained with an example.
Let’s say Mr and Mrs Smith are surf lovers. They decided during the pandemic to buy their own property as it would be safer plus they loved the thought of all the other perks which comes with having your own holiday home.
They purchased a flat in Newquay for £200,000 via their own Limited Company. The market rental price for the property would be £500 per week during the 6-month surfing season and £100 per week during the rest of the year.
Both Mr and Mrs Smith are directors of the company and use the flat for holidays 4 weeks per year (3 weeks during surf season and 1 week during the slow season). The sole reason the property was bought was as a holiday home for the couple and it has only been used as such.
Because the flat was habitable for the entire year, HMRC would seek a benefit measured on availability for the whole year (even though they only use it for 4 weeks).
Therefore, a cash equivalent for the benefit would be £15,600. Six months during the surf season at £500 per week and 6 months off-season at £100 per week.
What’s more none of the tax perks would apply as the property is not available for the set days or let to other holidaymakers for a minimum number of days.
Granted if the property was personally owned, different tax rules would apply and the bill would be significantly lower. But the lesson here is if you are going to buy a holiday let you need to count the days that you are using it for yourself.
The benefit in kind charge is higher the more you use it for yourself.
What’s an ATED
Another tax imposed on Companies which is not commonly understood is the Annual Tax on Enveloped Dwellings (ATED). ATED is a tax that companies must pay if their UK residential property value exceeds £500,000. The tax is payable by companies and the amount of tax payable depends on the property’s value.
If you own a UK holiday let via a Company, you will need to complete an annual ATED. A Return is necessary if:
- It is considered a ‘dwelling’ (a sufficiently self-contained unit),
- It is valued at more than £500,000.
- And it is owned completely or partly by a company, partnership or collective investment scheme.
The tax due is calculated on the value of the property.
The chargeable amounts for the 2022/23 tax year are as follows:
|Property value||Yearly charge|
|£500,000 – £1 million||£3,800|
|£1 million – £2 million||£7,700|
|£2 million – £5 million||£26,050|
|£5 million – £10 million||£60,900|
|£10 million – £20 million||£122,250|
|More than £20 million||£244,750|
More information on ATED can be found here.
If you are a landlord thinking of diversifying into the Holiday Let market, it is not all plain sailing.
You could be forgiven for wanting to sell your buy to let investment property due to the aggressive stance the government continues to take towards landlords. But you need to be aware of the tax and other factors.
There are increased regulations in the FHL arena too as many areas in the UK are capping the number of short lets. This is in response to overcrowding and the effect on the local community due to increases in the property prices.
The idea of owing that holiday home is appealing to so many but the decision needs to be thought through. From a tax perspective some holiday homes are more equal than others so speak to us before you decide.
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