Furnished holiday lets

If you’re a landlord with properties in popular holiday destinations, you may have considered a Furnished Holiday Let (FHL) as a tax-efficient alternative to traditional buy-to-let properties. The recent changes in tax relief on interest payments for buy-to- let properties have prompted landlords to explore this option.

WHAT IS A FURNISHED HOLIDAY LET?

An FHL is a distinct property category, separate from residential and commercial properties. HM Revenue & Customs views FHLs as a trade, meaning they come with their own tax implications and benefits. However, classifying a property as an FHL must meet specific criteria.

CRITERIA FOR FURNISHED HOLIDAY LET

The property must be located in the UK or European Economic Area, furnished for normal occupation, meet occupancy tests and be commercially let with the intent to make a profit.

OCCUPANCY TESTS: DETERMINING FHL STATUS

There are three occupancy tests that a property must pass to qualify as an FHL:

Pattern of occupation condition: If lettings exceeding 31 continuous days total more than 155 days per year, your property won’t qualify as an FHL. Availability condition: Your property must be available for letting as an FHL for at least 210 days in the year.

Letting condition: You must commercially let the property as an FHL for at least 105 days in one year.

TAX BENEFITS OF FURNISHING YOUR PROPERTY

The cost of furnishing your holiday let can be claimed as capital allowances, allowing you to deduct these expenses from your pre-tax profits – a benefit not available to long-term rental properties.

PENSION CONTRIBUTIONS AND PROFIT SPLITTING

The income generated from an FHL is deemed ‘relevant earnings’, enabling you to make tax-advantaged pension contributions. Moreover, unlike long-term rentals, FHL profits can be distributed based on each person’s beneficial interest in the property or the actual work done in letting it.

SELLING YOUR PROPERTY AND MORTGAGE INTEREST RELIEF

Selling your FHL property can also come with certain Capital Gains Tax reliefs unavailable to traditional rental properties. Furthermore, mortgage interest is fully deductible – a significant advantage over other residential property lettings, which currently have restrictions on relief claims.

THE DISADVANTAGES OF FURNISHED HOLIDAY LETS

• VAT AND LOSSES – If your FHL property portfolio exceeds the VAT threshold (currently £85,000 tax year 2023/24), you must become VAT-registered. Additionally, losses from an FHL cannot be offset against other income but can be carried forward and offset against future profits.
• INCREASED WORKLOAD – Managing an FHL involves more day-to-day tasks, such as monitoring the number of days it’s let for and ensuring it’s filled to meet the required days.

Don’t forget, our professional friendly advisors are on hand to support you and can help you explore all of your options.

*Please note that after the announcement in the Spring Budget 2024, Furnished Holiday Lettings (FHL) tax regime will be abolished.