What Are the Tax Benefits of a Furnished Holiday Let?

Posted by Linda Maclaughlan on 08 November 2016

Want the full low-down on the benefits you can expect from your furnished holiday let?

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It’s no secret owning a property that qualifies as furnished holiday let (FHL) can mean some fantastic tax benefits and allowances, but not everyone is clued up about what those benefits actually are – you may even be wondering: “Is it really going to be worth it?”

Especially if you’re new to the world of holiday letting, you might be feeling a bit on the fence and unsure about the benefits and allowances you can expect – in fact, from running a holiday letting business myself, this is something I get asked about all the time.

So, below I’m going to try and break these benefits down for you, to give you a much better idea of why furnished holiday lets can be a very attractive option tax-wise.

What are the tax benefits of an FHL?

A colleague of mine, Jonathan Short of Douglas Home & Co., says: “There are special tax rules for properties that qualify as Furnished Holiday Lets.

“For instance, you’ll probably be able to claim capital allowances on plant and machinery purchases, your profits count as earnings towards your pension, and you can claim various capital gains tax reliefs when it comes to selling.”

Let’s take a more in-depth look at some of these benefits below:

Capital allowances

Capital allowances can be made on capital expenditure up to the first £250,000 you make on your holiday let. This includes expenditure on furniture, fixtures and fittings, and equipment, and these will qualify for a 100% annual investment allowance (AIA).

AIA allows for expenditure on the installation/purchase of such items to be entirely written-off for tax purposes in the tax year you incur the expenditure – as long as your property qualifies as a furnished holiday let in that year.

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TIP: Please note that capital allowances will not apply to the cost of the actual property itself, or the land it is built on.

Capital gains tax

If your property qualifies as an FHL (and therefore is classified as a ‘business asset’), you can also look forward to various capital gains tax reliefs:

  • Entrepreneurs’ relief – A reduced rate of 10% payable on any of your capital gains from the sale of the property (with a lifetime limit of £10 million)
  • Gift relief – If a property is given as a gift, the resulting capital gain can be frozen and will only be liable to capital gains tax when the recipient sells.
  • Replacement of business asset relief – If a property is sold, the resulting capital gain can be deferred by offsetting it against the cost of a replacement business asset acquired within three years of its disposal (either as a sale or gift).

Pension savings

The profits you make from running a furnished holiday let are classified as ‘relevant earnings’ which means that you can make bigger contributions to your pension – known as ‘tax advantaged pension savings’ – that you wouldn’t normally be able to do with ordinary businesses.

Proportion of profits

Since a lot of holiday let businesses are family run, usually with spouses both putting in a fair share of the work, profits can be allocated in any proportion you deem appropriate – regardless of the size of their share in the ownership of the property itself.

Talk to a qualified accountant

You’re probably already aware that tax rules change – for instance, you can no longer offset any losses against other income, but you can offset losses against future holiday let income. That’s why it’s always best to get some solid advice from a professional.

For more on the tax benefits and allowances you can expect for your own holiday let business, and to get a better idea of your potential profits, I’d highly recommend seeking out a qualified, professional accountant who will be able to advise you further.

Conclusion

I hope you’ve found this blog useful when learning more about the various tax benefits and allowances you can expect from running a furnished holiday let – however, if you do want more advice about any aspect of running a holiday let, feel free to get in touch – I’m here to help!

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