Tax on Holiday Lets in the UK

Owning a furnished holiday let is an excellent opportunity to make money. But is there a tax on holiday lets in the UK, and how do you pay it? Is there any tax relief you can claim?

Read on to find out everything about holiday lettings tax and the ups and downs of owning such property.

What is a Furnished Holiday Let?

A furnished holiday let in the United Kingdom is a self-catered property that is continuously let to different people for a shorter period, but no more than 31 days. Furthermore, an FHL should meet the following criteria:

• The property is located in the UK or the European Economic Area, including Iceland, Liechtenstein and Norway.
• You are commercially letting the property and expect to make profits.
• The property is furnished, and the occupants have everything necessary to live normally while visiting.
• Meet the pattern of occupation, availability and letting conditions.

However, your property will no longer be considered an FHL if you sell it, use it for private occupation and if it doesn’t meet the letting conditions.

The investment statistics in the United Kingdom show that many Brits are leaning toward buying a letting property. Considering the many advantages over other types of lettings and the holiday let tax rules in 2022, the number of furnished holiday lets is increasing.

Furnished Holiday Let Tax Rules

Buying a second property in the UK and qualifying it as a furnished holiday let means you might be eligible to pay business rate taxes. Note that the tax on furnished holiday lets is not the same as on residential buy-to-let properties in the UK. A BTL is considered an investment and has different taxation rules.

The business rates depend on the country where your holiday let is located. The Valuation Office will assess the rateable property value and forecast the property’s earnings. 

When the rateable value is £12,000, your FHL will be free from paying the business rates in England. Additionally, if the property value is between £12,001 and £15,000, you will be eligible for Small Business Rate Relief. Other business rates rules apply for properties in Wales and Scotland.

The tax year for HMRC is from 6 April till 5 April the following year, meaning you must work out the profits and losses from your holiday lettings every 5 April.

Paying Holiday Lettings Tax in the UK

As a holiday letting property owner, you must file a self-assessment tax return every year by 31st January. You only pay furnished holiday lettings tax on your profits, while you can carry forward any losses from the FHL against your EEA FHL profits in the following years. However, you cannot offset the FHL losses against your other types of income.

Additionally, you can claim the allowable expenses and tax relief on holiday lets with your self-assessment tax return.

Holiday Let Tax Advantages and Disadvantages

Having a holiday let property in the UK has its benefits and drawbacks when it comes to paying taxes.

Advantages of Furnished Holiday Lets

1. Capital Gains Tax on Holiday Lets

Normally, when you dispose of a property, you are liable for paying 18% to 28% capital gains tax according to your income tax band. But, these rates don’t apply on FHL, and if you decide to sell it, you can be eligible to get tax relief like:

• Eneterpenuers relief – pay 10% tax on the qualifying assets gains,
• Business assets rollover relief – delay paying CGT if you use all or part of the money from the sale for buying another holiday home.
• Gift hold-over relief – claim relief if you gift the property or sell it for a price lower than its value.

Keep in mind that if you personally use the FHL, only the expenses associated with income-earning activities can be claimed. So, for instance, when you use the FHL 20% of the time in one year for personal reasons, you can only deduct 80% of the expenses against your profits.

2. Mortgage Interest Relief

The mortgage interest for your FHL can be deducted from the profits when you are paying taxes. What’s more, there is no threshold on the interest you can offset against your FHL letting proceeds. With the interest relief, you will earn more money from your property and pay your mortgage faster without incurring tax charges.

3. Claiming Furnished Holiday Let Capital Allowances

You can offset expenses against your taxable profits if they are for commercial use. As an example, under capital allowances in the “plant and machinery” section, you can claim: 

• Furniture and furnishings
• White electrical goods and appliances
• Kitchen units
• Carpets
• Expenses for repairs and replacements

4. Tax-Advantaged Pension Contributions

Your income from FHL is classified as Net Relevant Earnings, meaning you can contribute towards your pension benefits. The earnings will proportionally increase the maximum contribution you can make in one year. The tax relief on private pension contributions currently applies to 100% of your annual earnings up to £40,000.

5. Flexibility with Splitting the Profits

According to the holiday let taxation rules, the profits of an FHL with shared ownership don’t need to be equally distributed. This gives you the right to split the earnings for tax purposes with the other owner as you like.

6. Inheritance Tax Relief

Furnished holiday lets in the UK are eligible for Business property relief, which allows tax-efficient inheritance planning. 

7. No Council Tax

You are not required to pay council tax on holiday lets. However, as we previously mentioned, your property will be classified as a business, and you will have to pay business rates if you are eligible. If you let your self-catering accommodation short-term for more than 140 days and do not qualify for an exemption, you will need to pay Business Rates Property tax.

8. No National Insurance Contributions

Another upside to the holiday let tax rules in the UK is that this type of property is exempt from paying National Insurance contributions. Just an FYI, if you don’t pay National Insurance in the UK for your other revenue streams, you will get a Notice of Penalty Assessment.

Disadvantages of Furnished Holiday Lets

1. VAT

In the UK, Value Added Tax or VAT is paid on furnished holiday lets with annual turnover higher than £85,000. If your FHL exceeds the threshold, you must register for VAT and pay a rate of 20%. If you exceed the VAT threshold, you must register within 30 days after the end of the month. 

When you need to pay VAT, you can increase the rental rates and risk losing guests or deduct the VAT from your earnings. On the bright side, with such a high threshold, you will only have to worry about it if you have multiple FHL properties.

2. Wear and Tear

Considering the purpose of holiday lets, they accommodate many different occupants. Since the property is constantly let, its furniture and appliances are more frequently damaged compared to residential lettings. 

3. Day-to-day Responsibilities

Deciding to have a holiday let property will take a lot of your time. Some of your daily tasks will include managing bookings, solving the customer’s issues, advertising the property, ensuring there are enough occupants to meet the threshold and much more.

How to Save Tax on Holiday Lets?

Aside from the previously-mentioned deductions for holiday let property owners, there are other ways you can save on tax on furnished holiday lets. So don’t forget to include the following expenses when claiming tax relief.

• Fees for advertising and letting agencies
• Accounting fees
• Costs for cleaning services
• Maintainance costs
• Insurance expenses
• Gardening
• TV licence and subscriptions
• One of the advantages of working from home is making a claim for your home office.
• Energy and utility bills
• Claim initial expenditure for the money you spent before renting the property.

Bottom Line

We understand that managing a furnished holiday let in the UK is not an easy feat. But now that you are familiar with the holiday let taxation rules, we assure you it will be much easier. Most importantly, knowing what expenses you can claim can save you a lot of money while doing your taxes.