Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
Furnished holiday letting tax relief offers attractive financial benefits if property owners stick to some strict rules.
You don’t have to have a property beside the sea or close to a beauty spot to benefit as city breaks are just as popular with holidaymakers.
Staycations are all the rage with bookings booming as travel abroad is limited by the impact of coronavirus.
As a bonus, you can also enjoy some time off in the property.
This article explains the tax implications of owning a second home and how you can qualify for furnished holiday letting tax relief.
What is furnished holiday let tax relief?
Furnished holiday lettings come with tax breaks that are unavailable for other rented homes.
If a property qualifies as a furnished holiday let, the owners can claim:
- Capital Gains Tax rollover relief, holdover relief and business asset disposal relief (formerly entrepreneur’s relief) which reduce the tax due on the sale of the property
- Capital allowances on furniture, fixtures and fittings
- Small Business Rate Relief which can mean many furnished holiday lets pay no rates at all
- Full mortgage interest relief
- Split profits to reduce taxable income by ownership or actual work done to manage the property
- Carry forward of holiday let losses against future profits in the business but not against other income
On top of these, furnished holiday let profits count as earnings when working out pension contributions.
How property qualifies as a furnished holiday let
What makes a property a furnished holiday let comes down to meeting five strict conditions. Properties must comply with the tests for a complete tax year, which runs from April 6 to the following April 5.
If the property is let for the first time, the test applies to the 12 months after the letting started. If the property is withdrawn as a holiday let, the tests apply for the 12 months up to the date the letting ended.
The tests are:
The property must be in the UK or European Economic Area (EEA), which covers countries in the European Union plus Iceland, Norway and Liechtenstein.
Furnished means the property is ready to live in when a holidaymaker arrives with just their clothes and personal possessions.
The property is not a furnished holiday let if rented out for 31 days in a row for a total of more than 155 days in a tax year.
The property should be available for commercial let for at least 210 days in a tax year.
The property should let at commercial rates for at least 105 days in a tax year.
Lets of 31 days or more are not included unless the visitor stays for an unforeseen reason, like falling ill or having to stay longer due to travel delays.
Two options apply for properties that just fail to meet the furnished holiday let conditions:
If you have one holiday let but fell short of meeting the five conditions, you can make a period of grace election providing your business passes the occupation and availability tests.
To make a successful election, you must show you had intended to let the property, but your plans were thwarted.
Reasons supporting an election could include marketing providing fewer customers than other years or lettings were cancelled due to unforeseen circumstances, such as the coronavirus lockdown.
You can opt for the period of grace election the year after the property qualified as a furnished holiday let by passing the letting test.
A second election is allowed the following year if the letting test is failed again if you made an election the year before.
The property stops qualifying as a furnished holiday let after failing the tests for four years and two period of grace elections in a row.
Averaging is for property owners with several furnished holiday lets when one or more fails the letting test.
This HMRC example shows how averaging works:
Emma lets four UK holiday cottages in 2019-2020 for the following number of days:
If Emma uses averaging, all the cottages meet the letting condition (421 days/4 = 105).
Without averaging, Cottage 4 does not qualify.
You may average letting days for properties in the same furnished holiday letting business.
As UK and EEA furnished holiday letting businesses are separate, you cannot average across properties held in each.
Using grace periods and averaging together
Owners with two or more furnished holiday lets can combine the period of grace and averaging elections to show a property remains a furnished holiday let.
This HMRC example shows how:
Emma lets four cottages as furnished holiday lettings. In some years Cottage 3 does not meet the letting condition.
Averaging in Year 2 and period of grace elections in Year 3 and 4 to make sure that Cottage 3 qualifies for the whole period.
Making a grace or averaging election
Make the election in one of two ways:
- On your Self-Assessment property pages
- Separately within a year of the January 31 following the tax year end you are making the election for, for example, an election for the 2020-21 tax year should be reported by January 31, 2022.
Holiday let shuts for part of year
If your furnished holiday let closes for part of the year, you can still claim the running costs like mortgage interest, utilities and insurance for the whole year providing you do not use the property.
Should you, family or friends enjoy time at the property, any running costs should be apportioned accordingly.
Furnished holiday letting business stops
HMRC views furnished holiday lets as a business, while buy-to-lets are treated as investments.
The key that unlocks furnished holiday let tax breaks is the word ‘commercial’.
A commercial let applies to time the property is let to the public at a market rate.
Days when the owner stays at the property are not counted as days the home is available to let, nor are days when friends and family use the property for free or at a discounted rate.
The property stops qualifying as a furnished holiday let when:
- Switched to permanent private use
- Fails to pass the letting test even with averaging and grace period elections
When the property is no longer a furnished holiday let, any special tax breaks stop.
Find out more about furnished holiday let tax reliefs
HMRC publishes several help sheets that explain furnished holiday let tax relief in more detail: