Holiday Let Tax Guide
How to save tax on holiday lets (FHL)
Firstly, if you are thinking of investing in a holiday let it is a very tax efficient way of investing in property. This holiday let tax guide lays out the many tax advantages open to property investors as a result of a holiday let being classed by HMRC as a trade or business. A buy-to-let on the other hand is classed for tax purposes as an investment and therefore doesn’t benefit from some of these tax advantages.
Lets start by looking at some of the tax saving opportunities for an investor in a holiday let to save on income tax before moving on to look at the various routes to save tax through their capital investment.
How to save income tax with a holiday let (FHL)?
The major attraction of a furnished holiday let (FHL) is that HMRC class it as running a business or trade provided it meets certain occupancy rules.
There are a number of trading expenses or deductions available to the owners of a holiday let to reduce the taxable profit of the the holiday letting business. If you let properties that qualify as a furnished holiday let, then you will be able to claim tax relief on the following expenses. This is not an exclusive list of tax deductions for a holiday let as anything that has been reasonably incurred as part of the trade or business could be relieved against taxable profit.
- Professional fees inc accounting fees – you are entitled to tax relief on accountant fees that have been paid towards the preparation of your holiday home business accounts
- Advertising – Any costs incurred in advertising your holiday let can be include such as advertising with google or facebook. if you’re printing brochures, advertising in local papers or sending direct mail, you can claim this back as tax relief
- Insurance – the costs of insuring you holiday let will be able to claim this back against tax. Make sure you keep all of your insurance paperwork handy. I currently use Alan Boswell to insure my holiday let contents. The building is taken care by the management company that runs the mill building in which my holiday let is located.
- Loan interest – this is a MASSIVE PLUS compared to anybody that also has buy-to-let property where mortgage interest relief has slowly been removed. if you have used a mortgage or loan to purchase the holiday let, then you can claim the interest of repayments back against your tax in full. In this way you can still use the rents generated from your guests to pay down you borrowings without incurring a tax charge.
- Energy bills – any fuel, gas or electricity relating to the holiday let can be claimed back against tax. Do not try to claim energy bills that have not been used exclusively by holidaymakers and tourists.
- General Repair – Any property including a holiday let will need a whole raft of running repairs from redecoration to new roofs. Nearly all general repair costs can be claimed back against tax. Think about painting and decorating costs. Cleaning and Gardening – if you hire a cleaner or gardener to care for your property, you can claim the cost back against tax
- Cleaning costs – For most holiday let owners you will not want the responsibility of having to clean and launder the holiday let at every change over. For my holiday let that can amount to 8-10 change overs every month. Instead I employ and excellent local cleaning company that specialises in holiday let cleans to do the work for me. These costs can all be set against the taxable income of the holiday lettings business.
- Subscription packages – If you are subscribing to any subscription service that include wifi or TV subsription services for your paying guests this is all a legitimate cost to your holiday let and can therefore be offset against your profits.
- Gardening – if your holiday let is set in grounds want to make a perfect impression upon guests, then you will want to take extra care of your garden and outside areas so don’t forget to include these costs.
- Travel expenses – any travel expenses in connection with your FHL can be claimed at up to 45p a mile can be included without a taxable benefit being incurred. You will need to keep a mileage log.
- Home office – if you do run your business from home don’t forget to claim for your home office.
The profit ultimately you make from you holiday let will be taxed as income and will be added to any other income you earn as part of your tax assessment. If you do make a loss on your holiday let this loss can be carried forward against the future profits on that same FHL business. You cannot however off set your losses against other income incurred in that year.
Holiday let tax – splitting the rent tip
Another big advantage with a holiday let which is similar to a buy-to-let is that where there is joint ownership of the property it is possible to split the returns from the property between the owners in the most tax efficient way. I have dealt before on how to save tax by splitting the rent.
Therefore, where a husband and wife for instance own a property together then the division of the income can be made in a way that is most tax efficient for the couple.
The above are all advantages of running your furnished holiday let as a business but a FHL offers so much more opportunities to save tax for the created property investor. I will go on to examine the tax saving opportunities of owning a furnished holiday let and some of the tax saving strategies open to property investors.
Business rates tax exemptions for holiday lets
Since I started investing in furnished holiday lets I have benefited from the small business rate relief being levied by councils. Because a holiday let is classed as a business an investor is able to reregister their property for business rates and thereby benefit for rate relief. This is not available for buy-to-let investors who continue to be liable for council tax when the property is empty. This is increasingly charged at penal rates by councils who are keen to discourage landlords not to keep their buy-to-let properties empty for any period of time.
Capital gains tax relief for furnished holiday lets (FHL)
Qualifying FHLs are able to claim Capital Gains Tax relief for business. These are various and comprise of :
- Business Assets Rollover Relief
- Business Asset Disposal Relief
- Relief for Gifts of Business Assets
- Relief for Loans to Traders
- Business Asset Disposal Relief (Entrepreneurs Relief) means that when it comes time to sell your furnished holiday let you should only be liable to pay under Entrepreneurs Relief only 10% on any capital gains during the time that you owned the property as a posed to the 18% currently levied on buy-to-let property disposals for basis rate tax payers or 28% if you are a higher rate tax payer.
- In addition any capital gains can be first set your annual capital gains allowance.
Business Asset Roll Over Relief allows the deferral of capital gains tax payment depending on certain circumstances.
Capital allowances for your holiday let
Investing in a holiday let will obviously represent a significant capital investment for most people. Tax relief on your holiday let can be claimed via what are known as capital allowances.
Capital allowances can be claimed on moveable items such as your furniture in your FHL as well as white goods such as fridge/freezer, cookers, electrical goods (TVs) and then flooring such as carpets.
As well as these deductions available on the fitting within your holiday let many holiday let owners don’t realise the significant one off claim that can be made against the fixtures within their holiday let property. For tax purposes there are two types relating to the nature of the holiday let being taxed as a business. Firstly, there are integral plant/fixtures which include sanitary ware, integrated kitchen equipment. Secondly, there are integral features for instance the electrics, heating, air conditioning, etc.
The first set of plant fixtures from a writing down allowance of 18% of the capital cost whilst the second set of features only receive a writing down allowance of 8%.
These integral features can amount to 10-20% of the whole cost of furnished holiday let when purchased so very significant claim against your tax liabilities for that year. These allowances are only available on a newly converted or built property and can only be claimed once.
The complication is that these expenses will need to be claimed separately as part of your self assessment tax return and cannot simply be deducted as a revenue expense under the land and property section of your tax return. You may therefore require some specialist tax advice on how to do this.
Holiday lets pension tax bonus
I have said on many occasions in relation to all property investments they are very well aligned to providing the basis of a good pension whether it’s a buy-to-let pension or a holiday let investment. This is because at the core of all these investments you have an asset (residential property) that has an intrinsic value and which compared to most asset classes is a pretty robust store of value against all variety of economic conditions and crisis. In the long-term it’s value offers some up side potential when you look at real house price growth over the last 50 years. House prices have tended to rise at approximately on average 2.4% above the rate of inflation over the long-term which doesn’t sound massive but when you look at that increase compounded and that the fact that for most people holiday lets and other residential property investment is geared (with a mortgage or loan) then these increases can be significantly above many other asset classes.
The other great thing about a holiday lets property pension is that not only are you investing in an asset your also should have a revenue generating asset. So your holiday let should be generating regular annual income from your guests. This gross income could be anywhere up to 10% of the capital value of your holiday let. This lettings income can be a valuable addition to an individuals pension and retirement income.
Finally, the other big advantage of holiday lets which again relates to the business status of this property business is that the income received counts as ‘relevant earnings’ in assessing your potential pension contributions to a qualifying pension scheme. The tax relief on pension contributions made by an individual into a qualifying pension scheme is limited to the higher of 100% of their relevant UK earnings, or £3,600 per annum.
If you are looking a learning from experts more about investing in a holiday let have a look at the New Investing In Holiday Let Course being run by Property Hawk and leading industry experts.