In the UK and Ireland (and other European countries), a specific category of rental property is known as a “Furnished Holiday Let,” or FHL. Holiday rental owners can benefit from particular tax advantages but every country is not classified as FHL. For a property to be classified as an FHL by the HMRC, specific criteria must be met, including its availability, actual bookings, and degree of furnishing.
Do you have a property classified as Furnished Holiday Let? Are you aware of its tax advantages and disadvantages? If not, then don’t worry. This blog is a treat for you as it contains all the tax advantages and disadvantages of Furnished Holiday Let:
Advantages of Furnished Holiday Let
You enjoy many tax benefits if your property is classified as Furnished Holiday Let. Some benefits are listed below:
1. Share The Profits With Your Spouse:
One of the advantages is that your Earnings from long-term rental properties are divided following the official ownership split. For example, if you owned 50% of the property, you would receive 50% of the profits) Only if there is enough proof to show it. In that case, you can divide the profit from an FHL property according to each person’s beneficial ownership interest in the property or according to the labor put into renting the property.
2. Relief From Mortgage Interest:
The fact that the whole mortgage interest (section 24) can be deducted from the earnings of furnished holiday rents may be the most significant tax distinction between furnished holiday lets and buy-to-lets. Residential landlords are no longer eligible for this benefit, which has been reduced to the base income tax rate (20%). In the long run, this translates into paying less tax and keeping more of your earnings.
3. Contribute To Your Pension:
Since the income from an FHL property qualifies as “relevant income,” you can make tax-advantaged pension payments. This is the best tax advantage of furnished holiday lets so far!
4. Reduced Rollover:
For rollover relief, properties used for furnished vacation rentals qualify as business assets. When a profit is gained on the sale of a property, that gain may be added to the price of a furnished vacation rental purchased during the four-year window that begins 12 months before the sale. So as long as the replacement property is not sold before the gain is paid, CGT is not due.
5. The Cost Of Furnishing Your Home May Be Tax-Free:
Your FHL property may be eligible for capital allowances. This means that the expense of decorating your home to a luxurious quality can be deducted from your pre-tax profits as a result which will enhance your potential rental income. Keep in mind that this is not an option if your property is used for long-term rentals.
6. Capital Allowance:
Great news! As we know that capital allowance on Furnished Holiday Let is a great combination. Capital Allowance can deduct the cost of furnishings and equipment purchased, installed, or used inside the home. It also includes the equipment required to operate the furnished vacation rental business.
Disadvantages of Furnished Holiday Let
Obviously, when there are benefits, some disadvantages are also peeping out. Below are some disadvantages compiled to give you an overview:
1. Personal Use:
Any capital allowances claimed during that tax year must be justifiably and reasonably limited for personal use when the landlord’s family uses a furnished vacation rental property without charge. This restriction should be applied to the property’s yearly costs, such as municipal property taxes, utility bills, and water fees. A benefit in kind that must be declared to HMRC under the P11d regime may occur if the property is located within a firm.
2. VAT (Value Added Tax):
When you are enjoying profit, the dark side is that you have to pay tax on that particular profit; when your rental revenue exceeds a specific amount (above £85k), you must pay VAT (Value Added Tax) on it. The additional 20% that must be paid on the cost of staying at your rental impacts your profitability and pricing strategy.
This is less of an issue because you need to earn more than £1,500 to qualify for VAT registration. To exceed the limit for only one FHL property, 52 consecutive bookings must be made at the property. Thus, if you own a single FHL property, you shouldn’t be concerned. However, owning several FHL homes makes you more likely to need to register for VAT. Moreover, you run the risk of VAT if you operate a separate business in addition to an FHL property.
Running a vacation rental requires extra daily effort. This includes many tasks, such as marketing tactics in order to guarantee that the occupancy criteria are fulfilled, monitoring a booking calendar, and responding to client inquiries and problems. A lot of effort and time are required in this process.
4. Business Rates:
The Valuation Office will determine the taxable worth of your property based on its kind, size, location, quality, and how much revenue you are likely to generate from renting it out if your furnished vacation rental qualifies for business rates.
If you are wondering how you can qualify for business rate on Furnished Holiday Let, then keep in mind that you may be eligible for Small Business Rate Relief if you only rent out one property and its rateable value is less than £15,000.
5. Use And Abuse:
Compared to residential rentals, holiday rentals have a substantially higher number of occupants, meaning that the furnishings and appliances may see more wear and tear and require replacement more frequently.
The requirements to become an FHL are relatively easy to meet. Obtaining FHL status for your property is simple if you are committed to doing so. The significant tax breaks and return on investment are strong persuading effects of getting you to invest. Additionally, FHL-class properties are becoming increasingly popular daily, and tourism is growing exponentially, so you should take advantage of the opportunity.
So, you have already gone through the advantages and disadvantages of FHL. A Professional accountant can assist you in getting your property ready to receive a Furnished Holiday Letting designation earlier than you expected. A tax accountant in Milton Keynes can help you in every manner! You must visit and get your work done in no time.