1. Summary of Key Points
• Follow the guidance on “Can I pay less tax on my Buy to Let” as most of this also applies to holiday lets.
• A holiday let meeting certain conditions enjoys a more favourable tax treatment.
2. Background
Furnished holiday lets have long enjoyed a more favourable tax treatment than standard “buy to let” investment properties. This note deals with the differences between furnished holiday lets and “standard” lets. There is a separate note – “Can I pay less tax on my buy to let?” – covering the “standard” rules.
3. The Benefits of A Furnished Holiday Let
As a point of tax principle, the difference is that furnished holiday lets have historically been taxed as a trade, whereas “buy to lets” have historically been treated as investment properties. There are two main benefits which this produces:
- Capital allowances can be claimed for improvements to the property. This will generally lead to lower taxable profits, and may even produce a loss for tax purposes.
- Entrepeneur’s Relief should be available on the disposal of the property, with proper planning. This means a Capital Gains Tax rate of 10% and not 18% or 28%.
- If a taxable loss is made this can be offset against any earned income in the same tax year. So, for example, someone on PAYE would then be entitled to a tax rebate, whereas on a standard let a loss can only be carried forward to be offset against future letting profits.
4. The Tests
In order to claim the let as a furnished holiday let, it must:
• Be let on a commercial basis with a view to a profit. So renting it to lots of your friends at a big discount to the market rent does not qualify.
• Be available for letting on commercial terms to the public for at least 140 days in the tax year.
• No single occupany of more than 31 days during the tax year is permitted for at least 7 months during the tax year.
• It must be let for at least 70 days in the tax year. If more than one such property is being let, then providing they average at least 70 days in the year, they all qualify.
Note that the following are not requirements to meet the tax definition of a furnished holiday let:
• The property need not be located in a holiday resort.
• The people renting the property need not be on holiday.