Furnished Holiday Lettings (FHLs)

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Welcome to our comprehensive guide on FHLs. If you’re considering investing in a furnished holiday property or already own one, it’s essential to understand the unique tax and regulatory aspects of this type of short-term rental business. In this guide, we aim to provide you with valuable information to help you navigate the world of FHLs effectively and profitably.

We’ll begin by discussing what qualifies as a furnished holiday let and the criteria your property must meet. We’ll also explain the conditions for FHLs, including the availability, pattern of occupation, and letting conditions, as well as the importance of actively promoting your property. Next, we’ll cover the permissions you may need to let out a furnished holiday let and explore the various tax implications, including income tax, VAT, and special tax rules unique to FHLs.

Furthermore, this guide will delve into various aspects of managing your FHL business, such as choosing the right business structure, understanding and claiming expenses, maximising tax reliefs and allowances, and handling property and land transaction taxes. We’ll also touch upon annual tax deadlines, record-keeping best practices, cash flow management, and inheritance tax planning.

Whether you’re just starting out or looking to expand your FHL portfolio, this guide aims to provide you with the essential knowledge and tools to make informed decisions and effectively manage your furnished holiday let business. So, let’s dive in and explore the world of FHLs together.

What qualifies as a furnished holiday let?

To qualify as a furnished holiday let (FHL), your property must meet specific criteria as set out by HMRC. These requirements ensure that the property is suitable and intended for short-term holiday accommodation. The criteria for an FHL are as follows:

  1. Be let out on a short-term commercial basis with the intention of making a profit: Your property must be rented out to paying guests with the primary goal of generating income. If you occasionally let the property to friends or family at no cost or a significantly reduced rate, these lettings won’t be considered commercial and won’t count towards your FHL status.
  2. Satisfy the criteria for availability and promotion: Your FHL must be available for commercial letting for a minimum of 210 days (30 weeks) per year. Additionally, you must actively promote your property through marketing efforts, rental listings, or by using a holiday letting agency or online platform like Airbnb.
  3. Be located in the UK or the European Economic Area (EEA): Your FHL property can be situated in the UK or any country within the EEA, which includes all EU member states, as well as Iceland, Liechtenstein, and Norway.
  4. Provide sufficient furnishings for visitors: Your property must be equipped with adequate furniture and amenities to cater to the needs of your guests during their stay. Aim to furnish your property to a self-catering standard, ensuring that all furniture and equipment are available for guests to use freely.

If you own multiple FHLs in the UK, they will be treated as one business for tax purposes, but you must still maintain separate records for each property. If you have properties both in the UK and the EEA, they will be grouped separately: all UK properties will be classed as one business, and all EEA properties will be treated as another business.

In the next section, we will discuss the concept of commercial letting and its importance in determining whether your property qualifies as an FHL.

What is a commercial letting?

A commercial letting refers to renting out a property with the primary intention of generating profit. In the context of furnished holiday lettings (FHLs), this means offering short-term accommodation to paying guests while aiming to make a profit from the rental income.

When determining whether your property is let out on a commercial basis, consider the following aspects:

  1. Rental rates: Charging competitive market rates for your property is essential for it to be considered a commercial letting. Offering lower rates during off-peak seasons is acceptable, as long as the primary goal remains to generate income. However, letting the property to friends or family at no cost or a substantially reduced rate won’t count as a commercial letting.
  2. Active promotion: Actively marketing and promoting your property is a key aspect of commercial letting. You can use various channels to advertise your FHL, such as online rental platforms like Airbnb, holiday letting agencies, or traditional marketing efforts like print and online advertisements.
  3. Regular turnover of guests: To maintain your FHL status, your property should cater to short-term guests rather than long-term tenants. The pattern of occupation condition stipulates that a single guest cannot occupy the property for more than 31 consecutive days or more than 155 days in one year.

In the following section, we will discuss the type and extent of furnishings required for a property to qualify as a furnished holiday let.

What furniture do I need to supply to qualify as a furnished holiday let?

To qualify as a furnished holiday let (FHL), your property must be equipped with an adequate amount of furniture and amenities to meet the everyday needs of your guests. The goal is to provide a comfortable, self-catering experience for visitors during their stay. While there isn’t a strict list of required furnishings, the following suggestions can help you determine what to provide:

  1. Essential furniture: Supply basic furniture such as beds, sofas, chairs, tables, and wardrobes to ensure your guests have a comfortable stay.
  2. Kitchen equipment and appliances: Equip your kitchen with essential appliances like a fridge, cooker, microwave, toaster, and kettle. Additionally, provide sufficient cookware, utensils, crockery, and cutlery for guests to prepare and enjoy their meals.
  3. Bathroom essentials: Ensure your bathroom has necessary fixtures and fittings like a shower or bathtub, toilet, sink, and storage for toiletries. Providing towels for guests is also recommended.
  4. Entertainment and connectivity: Offer a television with a suitable license, and consider providing a Wi-Fi connection for your guests.
  5. Heating and lighting: Make sure your property has adequate heating and lighting systems in place to ensure a comfortable environment for your guests.
  6. Miscellaneous items: Depending on your target market and location, consider providing additional amenities like an iron and ironing board, hairdryer, outdoor furniture, or a barbecue.

Remember that all furniture and equipment within the property must be available for guests to use freely. Regular maintenance and replacement of furnishings will help ensure your property continues to meet the FHL requirements while offering a pleasant stay for your guests.

In the next section, we will explore the specific conditions that a property must meet to qualify as an FHL, including availability, occupancy, and promotional requirements.

What are the conditions for FHL?

To qualify as a furnished holiday let (FHL), your property must meet certain conditions related to availability, occupancy, and promotion. These conditions are designed to ensure that your property is genuinely operated as a short-term holiday rental business.

a. The availability condition: Your property must be available for commercial holiday letting for a minimum of 210 days (30 weeks) per year. Any time spent by the owner living in the property does not count towards this requirement. Your property won’t be considered an FHL during periods when you reside there, even if a paying guest is also staying.

b. The pattern of occupation condition: Your property cannot be let to the same customer for more than 31 consecutive days or for more than 155 days (22 weeks) in one year. Exceeding these limits would classify your rental as a long-term let, disqualifying it from FHL status.

c. The letting condition: Your property must be commercially let to the public for at least 105 days (15 weeks) per year. If you own multiple FHLs, you can use an averaging election or a period of grace election to help you meet this criterion. This allows you to calculate the average occupancy rate across all your FHLs, rather than assessing each property individually.

A “year” for FHL purposes is typically a tax year, running from 6th April to 5th April. However, for new FHLs, a year is defined as a 12-month period beginning on the day the property was first let as furnished accommodation.

d. Promotion: Your FHL must be actively promoted to attract guests. This includes marketing activities such as listing your property on rental platforms like Airbnb, advertising through a holiday letting agency, or using other promotional channels to reach potential customers.

In the upcoming sections, we will discuss the permissions required for letting out a furnished holiday property and the tax implications of running an FHL business.

Do I need permission to let out a furnished holiday let?

Whether you need permission to let out a furnished holiday let (FHL) depends on several factors. For example, if you’re converting an existing property into a holiday let or changing its original purpose, you might need permission from your mortgage provider or planning permission from the council. Other considerations may include local homeowners’ associations, if applicable.

Before embarking on your FHL venture, it’s essential to research and adhere to any regulations, permissions, and requirements that apply to your specific situation. This may involve consulting with a property lawyer, your mortgage provider, or your local council to ensure you have the proper authorisations in place.

In the next section, we will discuss the tax implications of earning income from a furnished holiday let, including allowable expenses and VAT considerations.

Do I need to pay tax on income from a furnished holiday let?

If you earn income from a furnished holiday let (FHL), you need to report it to HMRC and pay any tax due. The good news is that FHLs are treated as a commercial business for tax purposes, allowing you to offset certain expenses against your income to reduce your overall tax bill.

a. Allowable expenses for furnished holiday lets: You can deduct various expenses related to your FHL when calculating your taxable income. These allowable expenses include, but are not limited to:

  • Heat, light, and eligible utilities
  • Waste collection
  • Maintenance and repairs (including gardening and housekeeping)
  • Loan interest directly related to the property
  • Accounting costs
  • Insurance costs
  • TV license and subscription fees
  • Advertising and promotion
  • Letting agency fees
  • Health & safety checks

b. What about VAT? You only need to register for VAT if your VAT-taxable turnover exceeds the registration threshold, currently set at £85,000 per year. If you need to register, you must follow the standard rules for charging, reporting, and paying VAT.

In the following sections, we will explore the special tax rules applicable to FHL businesses, including capital allowances, pension contributions, and Capital Gains Tax relief.

Do furnished holiday lets have special tax rules?

Furnished holiday lets (FHLs) differ from other types of property income, allowing you to take advantage of tax relief allowances that aren’t available with other rental income sources. We’ll cover these in more detail below. Note that if your FHL business makes a loss, you can only carry forward this loss against future profits from the same FHL business.

a. Capital allowances: FHLs are entitled to capital allowances on items intended to improve the facility and increase potential rental profit, such as furniture, white goods, fixtures, and equipment (like kitchen or bathroom amenities). Long-term rental accommodation doesn’t qualify for these allowances. You can deduct the costs of these eligible expenses from your pre-tax profits, reducing your tax liability on the rental income from your FHL.

b. Pension contributions: Profits from FHLs are considered relevant earnings for pension purposes, making them eligible for pension contributions (including employer contributions) depending on your income from the lettings.

c. Capital Gains Tax relief: If you make a profit from an asset that has increased in value since you acquired it, you might be subject to Capital Gains Tax (CGT). However, you may be able to claim relief against this if you sell your FHL property. There are three specific areas where you can claim CGT relief:

  • Business Asset Rollover Relief: If you reinvest the proceeds from selling your FHL into a new holiday home, you can delay paying the CGT you owe.
  • Business Asset Disposal Relief: Formerly known as ‘Furnished Holiday Let Entrepreneurs’ Relief,’ this relief applies only to qualifying FHLs. It allows you to pay the lower tax rate of 10% on gains from selling eligible business assets instead of the 28% rate applicable to higher-rate taxpayers.
  • Gift Hold-Over Relief: If you pass on your FHL to someone else for free or less than it’s worth, you won’t need to pay any CGT. This relief is particularly beneficial for passing property to younger family members, making inheritance and succession planning more tax-efficient. The recipient will pay CGT if they sell the property later.

These financial benefits are not available to long-term rental properties, making FHLs a more tax-savvy way to earn extra income.

Can I split the profits with my partner?

If you own a furnished holiday let (FHL) with your spouse or civil partner, you are allowed to flexibly distribute the profits between both of you for tax purposes. This is different from long-term rentals, where profits are shared based on the percentage of property ownership. For instance, if you own 40% of the property, you receive 40% of the profits. In the case of FHLs, you can distribute the profits between you and your partner as you see fit, offering more flexibility in managing your tax liabilities.

Record-keeping best practices for FHL businesses

Maintaining accurate records is essential for managing your furnished holiday let (FHL) business and meeting your tax obligations. Here are some best practices for FHL record-keeping:

a. Separate business and personal finances: Keep your FHL business finances separate from your personal finances by using a dedicated business bank account. This makes tracking income and expenses easier and ensures a clear audit trail.

b. Maintain up-to-date records: Regularly update your financial records, including income, expenses, invoices, and receipts. Digital tools and accounting software can help automate and streamline this process.

c. Keep records for the required period: HMRC requires you to keep records for at least five years after the tax return deadline for that tax year. Ensure you store all relevant documents securely during this period.

d. Track income and expenses per property: If you have multiple FHLs, keep separate records for each property. This allows for more accurate tracking and reporting of income and expenses for tax purposes.

e. Understand allowable expenses: Familiarise yourself with the allowable expenses specific to FHLs, so you can accurately track and claim them on your tax return.

f. Seek professional advice: If you’re unsure about any aspect of record-keeping or tax compliance, consider seeking advice from a qualified accountant or tax professional who specialises in FHLs. They can help ensure your records are accurate and compliant with HMRC requirements.

A guide to understanding and managing cash flow for FHL owners

Effective cash flow management is crucial for the success of your furnished holiday let (FHL) business. Here are some tips to help FHL owners understand and manage their cash flow:

a. Create a cash flow forecast: Develop a cash flow forecast to estimate your future income and expenses. This helps you anticipate cash flow fluctuations and plan for any potential financial challenges.

b. Monitor your cash flow regularly: Regularly review your cash flow forecast and update it based on actual financial performance. This will help you identify any discrepancies and make necessary adjustments to your financial plans.

c. Set aside funds for unexpected expenses: Unexpected expenses, such as property repairs or maintenance, can strain your cash flow. Set aside funds in a contingency account to cover any unforeseen costs.

d. Manage seasonality: FHL businesses often experience seasonal fluctuations in demand. To maintain a healthy cash flow during low-demand periods, consider offering discounts or promotional offers to attract guests, or explore alternative revenue streams, such as hosting events or offering additional services.

e. Streamline payment processes: Ensure you have efficient payment processes in place to collect payments from guests promptly. Consider using online payment systems or credit card processing services to facilitate faster payments.

f. Keep an eye on expenses: Regularly review your expenses and look for opportunities to cut costs or negotiate better deals with suppliers.

g. Maintain a healthy cash reserve: Aim to maintain a cash reserve to cover at least three to six months of operating expenses. This provides a financial cushion during lean periods or economic downturns.

h. Seek professional advice: Consult a financial advisor or accountant for guidance on cash flow management strategies tailored to your FHL business. They can help you identify potential issues and develop a plan to address them.

Annual tax deadlines and important dates for FHL businesses

Staying on top of important tax deadlines is essential for managing your furnished holiday let (FHL) business and avoiding penalties. Here are some key dates and deadlines that FHL owners should be aware of:

a. Self-Assessment Tax Return deadlines:

  • 5th October: Register for Self-Assessment if you haven’t done so already.
  • 31st October: Deadline for paper Self-Assessment tax returns.
  • 30th December: Deadline for online tax returns if you want HMRC to collect tax owed through your tax code (if you owe less than £3,000).
  • 31st January: Deadline for online Self-Assessment tax returns and payment of any tax owed.

b. VAT deadlines:

  • Quarterly: VAT-registered FHL owners must submit a VAT Return and pay any VAT due to HMRC, usually every three months. The specific deadlines depend on your VAT accounting period.

c. Payment on Account deadlines:

  • 31st January: First Payment on Account due (if applicable).
  • 31st July: Second Payment on Account due (if applicable).

d. Capital Gains Tax deadlines:

  • 30 days from the completion date: Report and pay Capital Gains Tax on the disposal of UK residential property.

e. Companies House deadlines (for limited company FHL owners):

  • Annual accounts: Due 9 months after the company’s accounting reference date.
  • Confirmation statement: Due annually within 14 days of the company’s confirmation statement due date.

Ensure you keep track of these deadlines and submit the required information and payments on time. It’s also a good idea to consult with a tax professional or accountant to ensure you’re meeting all your tax obligations as an FHL owner.

A guide to business structures for FHL owners: Sole proprietorship, partnership, or limited company?

Choosing the right business structure for your furnished holiday let (FHL) can have significant implications for tax, liability, and administrative requirements. There are three main business structures to consider for FHL owners: sole proprietorship, partnership, and limited company.

a. Sole proprietorship:

  • Simpler to set up and manage.
  • Personal and business assets are not separate, meaning unlimited personal liability for business debts.
  • Taxed as personal income, and you may need to make Payments on Account.
  • No need to file annual accounts with Companies House.

b. Partnership:

  • Suitable for multiple owners or when sharing profits with a spouse.
  • Each partner is personally liable for business debts, and partners share responsibility for business decisions.
  • Partners pay tax on their share of the partnership profits.
  • No need to file annual accounts with Companies House, but a partnership tax return is required.

c. Limited company:

  • Personal assets are separate from business assets, offering limited liability protection.
  • More complex and costly to set up and manage.
  • Corporation tax on profits, and additional taxes on dividends or salaries paid to owners.
  • Annual accounts and confirmation statements must be filed with Companies House.

Each business structure has its advantages and disadvantages, and the best option for your FHL business depends on your individual circumstances, goals, and risk tolerance. It’s important to consult with an accountant or tax advisor to help you make the right choice for your FHL business.

Inheritance tax planning for FHL owners

Inheritance tax planning is crucial for FHL owners to ensure the efficient transfer of assets to the next generation while minimising tax liabilities. Furnished holiday lettings can be considered business assets, and as such, they may qualify for valuable inheritance tax reliefs. Here are some key points to consider for FHL owners:

a. Business Property Relief (BPR): FHLs may qualify for BPR, which can provide up to 100% relief on the property’s value for inheritance tax purposes. This means that the property could be passed on to the next generation without incurring inheritance tax. However, the FHL must have been owned and operated as a business for at least two years before the owner’s death to be eligible for BPR.

b. Gifting FHL assets: FHL owners can gift their property to family members during their lifetime, which may help reduce the value of their estate and potentially lower inheritance tax liabilities. However, the gift must be made at least seven years before the owner’s death to avoid being subject to inheritance tax.

c. Trusts: Placing an FHL into a trust can be an effective way to manage inheritance tax liabilities and protect the asset for future generations. A trust can help to control how the property is managed, and who benefits from it, while potentially reducing inheritance tax exposure.

d. Will planning: A well-structured will is essential for FHL owners to ensure that the property is distributed according to their wishes and in a tax-efficient manner. FHL owners should consult a solicitor or estate planner to create a will that incorporates their FHL business.

Inheritance tax planning for FHL owners can be complex and requires careful consideration of various factors. It is advisable to consult a professional tax advisor or estate planner to develop a personalised plan that meets your needs and objectives.

A guide to maximising tax reliefs and allowances for FHL owners

Maximising tax reliefs and allowances can significantly reduce the tax burden for furnished holiday let (FHL) owners. Here is a guide to some of the key reliefs and allowances available to FHL owners:

a. Capital allowances: FHL owners can claim capital allowances on qualifying items used to improve the property and increase its rental potential, such as furniture, fixtures, and equipment. These costs can be deducted from pre-tax profits, reducing the amount of tax owed on rental income.

b. Annual Investment Allowance (AIA): The AIA allows FHL owners to deduct the full cost of qualifying capital expenditure from their taxable profits, up to a specified limit. This can result in significant tax savings, particularly for those undertaking substantial investments in their FHL business.

c. Mortgage interest relief: FHL owners can claim mortgage interest relief on loans taken out to purchase or improve the property. This can help reduce the taxable profit on which income tax is due.

d. Repair and maintenance expenses: The costs of repairs and maintenance for an FHL property can be deducted as allowable expenses, reducing taxable profits.

e. Business Property Relief (BPR): As mentioned in the previous section, FHLs may qualify for BPR, which can provide up to 100% relief on the property’s value for inheritance tax purposes.

f. Capital Gains Tax reliefs: FHL owners may be eligible for various Capital Gains Tax reliefs, such as Business Asset Rollover Relief, Business Asset Disposal Relief, and Gift Hold-Over Relief, which can help reduce or delay the tax liability on the sale or gifting of the property.

To maximise tax reliefs and allowances for your FHL business, it’s essential to keep accurate records of all income, expenses, and investments related to the property. It’s also recommended to consult a professional tax advisor to ensure you’re taking advantage of all available tax-saving opportunities.

Property and land transaction taxes for FHL acquisitions and disposals

When acquiring or disposing of a furnished holiday let (FHL) property, it’s essential to be aware of the property and land transaction taxes that may apply. These taxes vary depending on the location of the property within the UK.

a. England and Northern Ireland: In England and Northern Ireland, Stamp Duty Land Tax (SDLT) applies to property transactions. The SDLT rates depend on the property price, and different rates may apply if the property is a second home or an additional residential property. FHLs are generally treated as residential properties for SDLT purposes.

b. Scotland: In Scotland, the Land and Buildings Transaction Tax (LBTT) applies to property transactions. Similar to SDLT, the LBTT rates depend on the property price, and a higher rate may apply to second homes or additional residential properties. FHLs are typically considered residential properties for LBTT purposes.

c. Wales: In Wales, the Land Transaction Tax (LTT) applies to property transactions. The LTT rates are determined by the property price, and a higher rate may apply to second homes or additional residential properties. FHLs are generally treated as residential properties for LTT purposes.

When disposing of an FHL property, you may also be liable for Capital Gains Tax (CGT) on any profit made from the increase in the property’s value since its acquisition. As previously mentioned, FHL owners may be eligible for various CGT reliefs, such as Business Asset Rollover Relief, Business Asset Disposal Relief, and Gift Hold-Over Relief.

It’s crucial to seek professional advice when acquiring or disposing of an FHL property to ensure you’re aware of all applicable taxes and potential reliefs available to minimise your tax liability.

A guide to understanding and claiming expenses for FHL owners

Claiming allowable expenses for your furnished holiday let (FHL) business is an essential part of reducing your tax bill. Here’s a guide to understanding and claiming the expenses you may be eligible to offset against your FHL income:

a. Direct costs: You can claim expenses directly related to running your FHL, such as heat, light, waste collection, maintenance, and repairs (including gardening and housekeeping). Additionally, you can claim loan interest specifically related to the property, accounting costs, insurance costs, TV license and subscription fees, advertising and promotion, letting agency fees, and health & safety checks.

b. Capital allowances: FHLs are entitled to capital allowances on items that improve the facility and increase potential rental profit. This includes furniture, white goods, fixtures, and other equipment (such as kitchen or bathroom amenities). Remember, the property itself and its owned land are not eligible for capital allowances.

c. VAT: If your FHL business has a VAT-taxable turnover exceeding the registration threshold (£85,000 per year), you must register for VAT. You can then claim back VAT on eligible purchases and expenses related to your FHL business.

d. Travel and subsistence: If you need to travel to your FHL property for business purposes, you may be able to claim travel expenses, such as fuel or public transport costs. You may also be able to claim subsistence expenses, such as meals and accommodation, if the travel requires an overnight stay.

e. Home office: If you manage your FHL business from home, you may be able to claim a portion of your household expenses, such as utilities, council tax, and mortgage interest or rent.

f. Professional fees: You can claim expenses related to professional fees, such as accountant fees, solicitor fees, and surveyor fees, as long as they are directly related to your FHL business.

g. Training and development: If you or your employees undertake training and development related to your FHL business, you may be able to claim these costs as an expense.

Keep accurate records of all expenses and retain receipts for at least six years to substantiate your claims. Always consult with a professional accountant or tax advisor to ensure you’re claiming all eligible expenses and not overlooking any tax-saving opportunities.

FHL Accountants

In conclusion, understanding the tax rules and regulations for furnished holiday lettings (FHLs) is crucial for FHL owners to ensure compliance and maximise tax savings. From qualifying for FHL status to claiming expenses and managing cash flow, there are various considerations to keep in mind when running an FHL business.

To make the most of your FHL business, it’s essential to work with an experienced accountant or tax advisor who can guide you through the process and provide tailored advice for your specific situation.

At Mercian Accountants, we specialise in providing comprehensive accounting and tax services for FHL owners, helping you to streamline your business operations, minimise your tax liabilities, and maximise your profits. Contact us today to learn more about our services and how we can help your FHL business thrive.