Have you ever thought about owning a property in one of your favourite rural retreats or seaside resort? What could be more tempting than owning a property in such a place which can be personally used whenever you want and rented out for profit when not being used personally. The thing with Furnished Holiday Lettings is that they offer a much better return on investment than regular residential lettings. The interest is on an exponential rise for Furnished Holiday Lettings, and with increased popularity, it is, in fact, a worthwhile investment.
However, like any other investment or business, the significance of profit is directly related to how you work on it. With the increased popularity of self-catering among holidaymakers rather than choosing hoteling, now is a great time to take advantage of it. The answer to the question of whether it is worthwhile to invest in a fully Furnished Holiday Let is quite extensive and has several different factors impacting it.
Furnished Holiday Lets, in recent years, have been subjected to tough conditions. So, the first and foremost concern is how to qualify for a Furnished Holiday Let. Once the FHL status has been achieved, you are on the road to prosperity. The tax reliefs on FHL are way better than regular residential lettings, and the return on investment speaks for itself. Moreover, there are several other advantages that you can have. Let’s start with the conditions and move on to the tax and other benefits one by one.
The qualifying conditions for a property to be considered a Furnished Holiday Letting
The only hard part of gaining profit from a Furnished Holiday Let is in the beginning stages. Taking advantage of the highly profitable tax status of a Furnished Holiday Let requires you to fulfil a gamut of particular conditions. Let’s look into them one by one.
It is very important to know that for your property to be considered a Furnished Holiday Let, it has to be situated in the UK or the European Union. It seems pretty obvious but is one of the major conditions for qualification. However, this condition may change over time due to the Brexit impact in the future.
Moreover, there is no specific condition for your Furnished Holiday Let to be in a tourist density area. It can literally be anywhere inside the UK or European Union.
The level of furnishing
This condition has no set boundaries as to what extent the Holiday Let should be furnished. But from an estimating point of view and observation, it should be furnished enough for the visitors to make full use of it. In simpler words, the furnishing should be at the level that would make the Holiday Let operational. The rules may not be definite, but it is encouraged to furnish it to a level that makes it suitable for regular renting occupation.
The property must be commercially Let
If you wish to be a Furnished Holiday Let, the intention to make a profit should be there. It is not necessary to make a profit; however, you need to make sure that on paper, your motive is to make a profit and run a business. A well-formed business plan and working with professionals is enough to show your intention to make a profit. Even if the Furnished Holiday Let is not making any profit, but it passes as a commercial property on paper with the intent to make a profit, you are good to go.
A set number of Letting days is required for your property to be a Furnished Holiday Let
For qualification it is required that the property is made available to:
- Let for a minimum of 210 days (30 weeks) in a tax year.
- Rent out on a commercial level for a minimum of 105 (15 weeks) days in a tax year.
However, you must keep in mind that.
- Lets that exceed the limit of 31 days are not commercial lets. Moreover, letting to a friend or family at no cost or minimal cost is also not considered commercial, so make sure you keep track of this. If you are letting to a friend or family for the full cost, then it will be considered commercial and will count.
- It is also important to note that the first year is the probation period, and the above-mentioned criteria must be met to get out of it even if you are not making any profits.
The Furnished Holiday Let must be reserved for Tourists and Holidaymakers only
This requirement makes it necessary to make the Holiday Letting to be only available to tourists and holidaymakers in order to achieve the Furnished Holiday Let status. To clarify this condition let’s divide it into two parts:
- It means to not let the property to friends or family or using it personally.
- The property shouldn’t be given to local businesses and residents to let.
Even though charging a full undiscounted price to friends and family is considered, it is believed that the second condition should be given more importance.
Short term Letting
It is important that you don’t let the property to a single group to a particular individual or group for more than 31 continuous days. Apart from some exceptions, it is vital to meet this condition, at least in the first year to be on the safe side and retain the status of a Furnished and Reputable Holiday Letting.
It is not difficult to meet the 210 days availability condition as well as more temporary lettings. However, in the circumstances, it is possible not to adhere to the 105 days condition. In such a situation, if a person owns more than one let, it is possible to elect to the average rate of all the properties. These should, however, be fulfilling the 210 days and short-range letting conditions on their own. Moreover, an averaging election cannot be applied to Lettings of the UK and the European Union together. They should be treated separately.
Period of grace
Another major advantage of being a fully Furnished Holiday Let is that even if the 105 days condition is not met, there is a possibility of relief. If the intention of letting was there and the 105 days condition was met in a preceding year, a period of grace election can be made. This can continue for at max two years after that the conditions have to be strictly met in the third consecutive tax year to retain the status of a fully-equipped Holiday Letting.
Given that all the above-mentioned conditions are agreed upon, you will become eligible to enjoy all the benefits and advantages that come with being a fitted Holiday Letting complete with furniture. Let’s have a look at them.
The major advantage that Furnished Holiday Lettings have over other types of lettings is that it is regarded by HMRC as a trade practice. Due to this status by HMRC, Furnished Holiday Lettings qualify for the following tax reliefs:
Amplified pension contributions
A business owner of a Holiday Letting that is fully furnished can increase pension contributions. This is because the profits are treated as earnings for pension contributions.
The Capital Allowances
There are certain capital allowances that can be claimed to be a furnished and fitted Holiday Letting. These can include the costs of equipment installed or fitting costs etc. moreover, the cost of equipment that is used to run the Furnished Holiday Letting can also be claimed under this category.
Reduced Capital Gains
For furnished Holiday Lettings, capital gains tax relief such as holdover relief, entrepreneur’s relief, and rollover relief are available because these properties are treated as business assets rather than investments. For example, at the time of disposal of the Letting, gains arising could be taxed at the reduced 10% entrepreneur’s relief tax rate than the usual 28% rate which is applied to gains on disposal of regular residential lettings. Moreover, if the earnings of disposal are ‘rolled over’ into the procurement of another furnished holiday let or other business assets, then no tax liability would arise.
In a situation where the entire, or a considerable part of the business is being disposed of, the entrepreneur’s relief can be applied, if all the qualifying conditions were reached in the tax year before disposal. Such relief has the potential to allow an amount of up to £10 million of gains to be taxed at a mere 10% instead of the usual 18% or 28%.
However, HMRC won’t allow claiming an entrepreneur’s tax relief if an individual property is being disposed of that includes various other furnished holiday lettings. Out of a firm that includes various furnished holiday letting entities.
Furnished Holiday Letting properties are considered as company assets and therefore are eligible for rollover relief. This means that at the time of disposal if again arises, it is rolled over into the monetary amount of the furnished holiday letting assimilated over the course of four tax years which starts off 12 months prior to disposal.
As such, Capital gains tax is not required to be paid on the appreciation until the replacement property is sold off. Likewise, where an appreciation has arisen on disposal of assets from a separate company, the appreciation is rolled into a property hailed for use as a holiday letting complete with furniture.
If a person sells a valuable asset to their relative, apart from their spouse or partner, capital gains tax is to be paid on the market value rate. However, Furnished Holiday Letting being a business asset has different rules. The gains arising from these properties are passed to the fresh owner of the asset. The capital gains tax in any mount is then delayed till the fresh owner decides to dispose of it and it is not payable at the moment when the property is gifted.
In regular lettings, profit is split according to the ownership for tax purposes. For example, if 50% of the property is owned by an individual, then he is eligible to pay 50% tax on the profit received. However, since Furnished Holiday Lets are treated as trade practices, it gives you the flexibility to split the profits in different proportions. In this way, tax planning becomes really easy.
Given all these advantages, it is definitely worthwhile to invest in a Furnished and Fitted Holiday Let, but it is essential to have a look at the disadvantages and shortcomings.
Value Added Tax (VAT)
If you are Letting the whole accommodation, then a standard VAT is charged whether the property is a qualified Furnished Holiday Let. Moreover, if the landlord has registered for VAT, a 20% VAT is to be paid in addition to fees. There is a limit that if exceeded, the landlord is required to register for value-added tax. If the total amount charged at the Holiday Let including the other sales exceeds £85,000 in a tax year, then the landlord must sign up for value-added tax and pay.
Furthermore, a complete Furnished Holiday Letter should be careful if he is producing supplies that are eligible for tax while being self-employed. In this way, the total sales of the sole trade plus the turnover from Furnished Holiday Letting should be accounted for to consider if the VAT barrier has been crossed.
In England, if a property is available for letting on a short term basis for more than 140 days in a tax year, it becomes eligible for business tax rates instead of council tax. For Wales’s properties, the rules are a bit different. It is compulsory for the property to be let for a minimum of seventy days in a tax year for company rates to be applicable. Distinctive rules are applicable on properties in Scotland and Northern Ireland, areas where small firms rates relief are available.
The planning limitations and rules differ throughout the country. For instance, permission to plan is required in London for properties let for 90 days on a short term basis in a tax year. In case the property is on a leasehold, then the lease agreement could forbid subletting on a short term basis.
If a furnished vacation Let is being used by the owner and his family for private use, then all capital allowances to be claimed in that specific tax year are limited for personal use on a reasonable basis.
Technically, the limitation should also apply to the yearly costs for the property, like power charges, water charges, local property taxes, etc.
If all the qualifying conditions for a furnished Vacation Let are met, then all the advantages as mentioned above can be claimed. The disadvantages do exist, but the tax reliefs easily outweigh them. This shows that it is definitely worth to invest in a Furnished Holiday Let as the return on investment is great. Moreover, the advantages are way more and better than regular residential lettings making a Furnished Vacation Letting an easier and better choice for investors. However, the whole process requires extreme concentration and focus. It is advisable to hire a professional accountant. An accountant won’t just help you qualify the conditions but also help you retain the Furnished Holiday Letting status which is not an easy task. Moreover, you won’t be missing out on tax reliefs that you otherwise might, given that you are not a professional in the field. Fusion Accountants is doing an amazing job handling Furnished Holiday Letting clients. Have a look at what they have to offer.
Also, you need to make sure that you are ready to invest your time and effort into it. The most important factor for greater profits is the location. If you choose the location wisely, you have already done more than 50% of the work. Later on, management and marketing are the keys. It is important how you manage the Holiday Let and how you advertise it in the market. A good presentation will bring back customers and also make them suggest you to others. Make sure you provide the visitors with all the necessary equipment and services. This is because they are only there for a short period and it becomes vital to leave a good impression on them compared to long term accommodation lettings.