After reflecting on the holiday season you may like to call a villa by the sea ‘home’. As it’ll be your second home you may think about letting it out to cover some of the running costs; after all you won’t be living in it 52 weeks a year. The income generated would be taxable but there are a few rules which can help to reduce the tax burden. Here’s how to make the dream a reality.
The ‘furnished holiday let’ or FHL is a welcome tax break which allows you to own a residential property used for short term lettings. Essentially it’s a furnished buy-to-let property which needs to meet a few conditions:
- the property must be available to let for 210 days during the year
- it should be occupied for 105 days
- there shouldn’t be a single stay of over 31 continuous days by the person renting
- you can’t count days where you charge reduced/zero rent
- the property must be located in the EEA (European Economic Area).
So what tax benefits can you claim as part of the FHL?
Mortgage interest relief
Restrictions on mortgage interest tax relief were introduced from 1 April 2017 affecting buy-to-let investors.
The good news is that mortgages on FHLs are not impacted by this restriction and full interest relief is available against rental income.
Capital gains tax
There are a number of capital gains tax exemptions and reliefs that are not normally available to buy-to-let investors. Entrepreneur’s relief is the most significant of these. If you sold a FHL property, capital gains tax would be charged at 10%, a welcome bonus when compared to 28% which is payable for buy-to-let investors.
The cost of furnishing your FHL, which includes anything from furniture to white goods, can be written off for tax purposes against the rental profits. These would not be available to a buy-to-let investor whose property does not qualify as a FHL.
Business rates and council tax
You’ll have to pay business rates instead of council tax because the FHL qualifies as a business for rates purposes. You may however be entitled to small business rates relief which can eliminate the rates bill entirely.
If rent exceeds the current annual VAT turnover threshold of £85,000, HMRC will take the view that your FHL should be VAT registered. Most FHL landlords will be within the £85,000 limit but if there are rents above this please take advice.