We’ve noticed greater activity by our clients in furnished holiday letting (FHL) investment, maybe based on the probability of the COVID-19 pandemic generating at least a short-term boom in UK holidays over the next couple of years.
We think the way property income is taxed may well be up for change. But, in light of the renewed interest in FHL, where are we with furnished holiday let rules in 2021 and what are the tax considerations you need to know about?
What’s better about FHL income compared to normal buy-to-let income?
The advantages of furnished holiday lets are that:
- You can split the income like partnership income with your spouse.
- You get business asset disposal relief on a sale, or rollover relief.
- You can make pension contributions against the income.
- You can claim capital allowances, for example on the cost of furnishing the home.
- You get your mortgage interest fully deductible.
Trading structure of furnished holiday lets
Many people now hold buy-to-let property in limited companies. Does that also make sense for furnished holiday lets?
- Unlike with buy-to-let income, with an FHL you benefit from higher rate relief on the interest on any loan taken out to buy the property, which makes holding property personally more attractive.
- As above, you can share the income tax efficiently with your spouse.
- FHL income is not currently subject to national insurance.
Held in a company
- The income is taxed at 19% currently but that will increase to 25% in a couple of years as announced in the Budget.
- Despite the impending higher rate of corporation tax, if the income is retained in the company i.e. not distributed, a company structure shields that income from higher rates of tax which might be due if the property is held in personal names.
- Private use of the asset might be more expensive and messier to sort out in a company structure.
Those are just some of the factors to take into account and each case would need to be looked at individually, but maybe holding FHL properties personally still makes the most sense.
VAT rules for furnished holiday lets
If your FHL income exceeds £85000, then you would need to register for VAT. There is no such implication with buy-to-let income. The VAT issue applies whether you hold the property personally or in a company.
How do you qualify for FHL status?
The accommodation must be available for letting for 210 days and must be let for 105 days of the year.
In arriving at that 105 days:
- You don’t count any days where you let the property to friends or relatives at zero or reduced rates as this is not a commercial let.
- You don’t count longer-term lets of more than 31 days
FHL rules and COVID-19
The difficulty with FHL this year is that many FHL owners will not have managed to let out their property for 105 days. If they met the FHL conditions in 2018-2019 and 2019-2020, they could make a period of grace election which has the effect of the income being treated as FHL anyway despite the conditions not having been met.
The problem, however, is that a period of grace election only applies to the 105 days – your property still has to have been available for the 210 days and that might be hard to show in the year just passed. We hope that HMRC will announce some relaxation on this point.
We hope this article on furnished holiday let rules in 2021 and its potential benefits have been useful. As always, if you have any questions, please do get in touch.