What are the tax benefits of registering a property as a holiday let in the UK?

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With the rise of the sharing economy, many property owners are opting to register their properties as holiday lets. This business move allows them to take advantage of certain tax benefits to maximize their income. This article will delve into what these benefits are and the rules to qualify for them.

Furnished Holiday Lettings (FHL) and its Tax Advantages

Furnished Holiday Lettings (FHLs) are a particular type of rental business in the UK. To qualify as an FHL, your property must be furnished and available for letting for at least 210 days in a year. Furthermore, it must be actually let for at least 105 days.

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Once your property is classified as an FHL, you can then benefit from various tax advantages. Firstly, you can claim Capital Gains Tax reliefs for traders, which include Business Asset Rollover Relief, Entrepreneurs’ Relief, and relief for gifts of business assets.

Another benefit is that the profits from your FHL will count as ‘earnings’ for pension purposes. This means that the income you make from your FHL can be used to increase the contributions you can make to your pension savings.

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VAT and the Furnished Holiday Lettings (FHL)

When it comes to Value Added Tax (VAT), FHLs are also treated differently from other rental properties. As an FHL business, you can choose to become VAT registered. This allows you to reclaim VAT on your purchases that are related to letting the property.

However, it’s important to note that once VAT registered, you will need to charge VAT at the standard rate on the rents you receive. The standard rate currently stands at 20%. This VAT can then be offset against the VAT you have paid on your expenses, and you only pay HM Revenue and Customs the difference.

Income Tax Relief for FHL

Aside from VAT and Capital Gains Tax, there are also rules regarding Income Tax that can be advantageous for FHL owners. One of these is the ability to deduct full mortgage interest from your income before calculating your tax, which can significantly reduce the amount of tax you have to pay.

In addition, you can also deduct the cost of furnishings and equipment used in the FHL property. This includes the cost of replacing items such as furniture, appliances, and kitchenware. This is known as Replacement of Domestic Items relief.

Remember, however, to always keep detailed records of these expenses as they will need to be provided to HM Revenue and Customs if required.

Capital Allowances and FHL

FHL property owners can also benefit from Capital Allowances. These are deductions you can claim for the wear and tear of fixtures and fittings, as well as the cost of replacing them. For example, you might be able to claim for the cost of replacing a broken fridge or for redecorating the property.

To qualify for Capital Allowances, the expenditure must be wholly and exclusively for the purposes of the FHL business. This means that if you use the property yourself for part of the year, you may only claim for the proportion of the expenditure that relates to the letting business.

The Importance of Knowing the Rules

While the tax benefits of registering a property as a holiday let in the UK are attractive, it’s crucial to understand the rules and requirements. Missing the minimum letting days, for example, could mean losing these benefits for the year.

It’s also worth noting that if you have properties both in the UK and the European Economic Area (EEA), these can be combined to meet the letting requirement. However, they will still need to individually meet the availability requirement.

Taking the time to understand the tax benefits of registering a property as a holiday let can ensure you maximise your income. Always consider professional advice to ensure you’re making the most of the advantages available to you.

Business Rates Versus Council Tax

A crucial aspect to consider when registering a property as a holiday let in the UK involves the potential transition from council tax to business rates. While homeowners usually pay council tax, properties classified as FHL may be subject to business rates instead of council tax. This transition takes place because the property is being used for business purposes rather than as a residential dwelling.

Business rates are a form of local tax that is based on a property’s ‘rateable value.’ This rateable value is set by the Valuation Office Agency (VOA) and reflects the open market rental value on a particular date. On the other hand, council tax is a local taxation system with domestic rates. Each property is assigned to one of eight bands in the council tax system (A to H), according to its appraisal value.

In some cases, switching from council tax to business rates can lead to a financial advantage. For instance, if your property’s rateable value is less than £15,000 and your business only uses one property, you may qualify for small business rate relief, which can be up to 100%. This could mean paying less or potentially no business rates at all, making it a significant tax benefit for holiday lettings.

The Tax Year and the Importance of strategic Planning

The tax year in the UK begins on 6th April and ends on 5th April the following year. It’s important to keep this in mind when planning your holiday letting operations. For instance, you might want to ensure that you meet the minimum letting requirement of 105 days within this defined tax year to qualify for the FHL tax benefits.

Timely and strategic planning can also help you maximise other advantages. For example, if you plan to make significant purchases for your property, doing so at the start of the tax year could allow you to claim back a larger amount of VAT. Similarly, if you are planning any major repairs or replacements, scheduling them within the tax year you will claim them can maximise your capital allowances.

In Conclusion

Registering a property as a holiday let in the UK comes with a plethora of tax benefits. From claiming Capital Gains Tax reliefs and deducting full mortgage interest, to benefiting from income tax advantages and potentially switching from council tax to business rates – there are numerous ways to maximise your income from your holiday accommodation.

However, it’s essential to remember that each of these benefits comes with specific rules and requirements. Therefore, a comprehensive understanding of the guidelines, along with strategic planning within the tax year, can truly help property owners make the most of their holiday business.

Lastly, as the intricacies of tax law can sometimes be daunting, seeking professional advice is always a prudent move. Tax advisors can provide personalised guidance tailored to your circumstances, ensuring that you’re not only complying with the law but also optimising your financial benefits. After all, these tax benefits can make the prospect of operating a holiday let significantly more profitable and rewarding.