Furnished Holiday Lets (FHL) are becoming more and more popular in the UK, particularly in Scotland, with holidaymakers’ desires for a ‘staycation’ only increasing. But are you aware that these properties come with a different set of tax rules compared to your average rental or HMO property?
These rules can prove tax advantageous, as many reliefs which are normally only available to trading businesses can be claimed.
As well as differences in the tax rules, from 1 October 2022 accommodation let on a short term basis in Scotland requires a short-term let licences which must be applied for from your local council.
Tax obligations as a Landlord
Firstly, as a landlord of a property, you are obliged to report your rental income to H M Revenue and Customs, even if you are not making a cash profit. This point is often missed with landlords and can mean we usually end up being contacted by landlords once HMRC has contacted them.
As with a standard rental property, due to the tax rules associated with allowable expenses, an FHL landlord, although making a cash loss on the property, may have a profit for tax purposes. Where there has been a loss of tax to HMRC, they will look to charge both interest and penalties.
The level of penalties is dependent on several factors including whether HMRC has prompted the individual. Understanding your reporting requirement is very important.
The reporting of this income is currently done in the UK through the Self Assessment system.
To gain the tax advantages associated with an FHL, the property must qualify. HMRC has a series of qualifying conditions that must be met, including the location (the property much be in the UK or the EEA), the number of days the property is available, and the number of days it is actually let. In addition, it must be let commercially with a view to making a profit.
You may be aware that over recent years there have been many changes in tax for rental properties in terms of relief for loan interest, wear and tear allowance, and LBTT for additional properties. Letting a property as a furnished holiday let is a way to shelter your rental income from the tax impacts of some of these changes but with Making Tax Digital (MTD) still on the cards what will the future hold?
With so many changes both past and future it has never been more important to have up-to-date guidance and advice on this subject.
It is without a doubt that Furnished Holiday Lets attract a range of tax efficient reliefs and allowances that can be utilised year on year. It is important however that these reliefs are not taken for granted by becoming complacent with the rules surrounding this type of property. The occupancy test is something that is considered on an annual basis, and an FHL property can lose these tax efficient reliefs, despite the property being let in the same fashion as in previous years.
By forward planning, these criteria can be considered to ensure that the conditions are met and eligibility for these reliefs is preserved. A forward thinking approach to any property investment can be beneficial, as it can help to mitigate any current and future tax which may be payable.
There is a great deal of information to digest when managing an FHL and as such taking professional tax advice is essential.
If you are looking for advice relating to your FHL, please do not hesitate to contact Jen Kinnear, or your usual AAB contact.