Tax Implications of Holiday Lets

More people are having vacations in the UK as a result of the epidemic caused by the coronavirus, which has led to an increase in the number of vacation houses. There are over 300,000 residences in the UK that are considered to be holiday or second homes, according to reports. There are a lot of folks who think it’s a solid investment and an asset class that’s on the rise. Homeowners are coming up with inventive ways to add holiday homes, such as shepherd huts, hobbit dwellings, and converted farm buildings. These homes are becoming increasingly popular. In this post, we discuss holiday lets, including the eligibility requirements as well as the tax issues associated with holiday lets.

Holiday lets and their eligibility criteria

The UK’s HM Revenue and Customs (HMRC) provides a precise definition of holiday lets; therefore, it could be useful to begin by looking at what it considers to be a holiday home. In order to generate income, a vacation property needs to be in living condition and be able to be rented out on the market.

Availability and renting condition: During each tax year, the property must be available for rent for at least 210 days and must have been rented for at least 105 days in order to meet the requirements for both of these conditions. If a property remains unoccupied for more than 105 days during a tax year, the owner of the property has two alternatives available to them. They are able to calculate the typical number of days rented across all of their vacation properties if they own more than one vacation rental property. If they only own one, HMRC will let them to make a “grace election,” which allows days to be transferred from one year to another. This is only possible if they only own one.
Occupancy requirement: The 105 days do not cover rentals to family and friends at a discounted or free rate, nor do they include rentals that extend longer than 31 days. When a vacation home is lived in full-time, when it is sold, or when it has not been rented out for the required amount of days, the home is no longer considered a vacation home.

Tax implications of holiday lets

Once your property is considered an FHL, you can take advantage of some tax breaks, such as:

Business assets disposal relief: If you are selling a vacation rental as a business, you may be able to get business rollover relief. This means that you may not have to pay capital gains tax (CGT) on the money from the sale if you put it back into another business asset that qualifies. Also, if you just sold another business, you might be able to use your capital gains to buy a property to rent out for vacations. This way, you won’t have to pay CGT until you sell the property.
If you don’t plan to reinvest the money you get from selling your holiday rental business, you may be eligible for Business Asset Disposal Relief. If you meet a number of requirements, this reduces the CGT rate on the gain to 10%, instead of the normal rate of 28% for buy-to-let gains. You might be able to get “holdover relief,” which lets you keep any gain from giving away property. This means that the property won’t have to pay capital gains tax until the new owner sells it.

Mortgage interest relief: If you think about how mortgage interest relief for normal buy-to-let properties is getting less and less, and how that affects landlords, you might be surprised to learn that qualifying holiday lets still get the full mortgage interest relief. This could have a big effect on how much money your letting business makes.
Business rates: If you own an FHL, your home will be considered a business. This means that you will have to pay business rates, but you won’t have to pay council tax. It is a required condition, not a choice. Before you worry and think this is bad, you should know that business rates can be much less than council tax, which can save you a lot of money. Even some properties can get a break on their business rates.
Capital allowances: If you turn a demolished farm building into a new vacation rental, for example, you can get a tax break on your future earnings through capital allowances. Capital allowances will be given for plant and machinery, which in the case of real estate will include things like heating and bathroom fixtures. They can also be used to help pay for things like appliances. Capital allowances don’t have an expiration date and can be used to reduce the amount of tax you have to pay on the profit from a holiday let.
VAT – Most long-term rental income is not subject to VAT. How the building is treated and whether or not the owner or buyer decides to tax it affects how much money the property makes. But VAT is charged on income from vacation rentals.
Most people who own one or two holiday lets probably don’t think about VAT. However, if their annual income from holiday lets is more than £85,000, they must sign up for VAT, charge VAT on their rent, and pay it to HMRC every three months. This may cause their rents to go up, but they will be able to get the VAT back on any costs they incurred because of the letting.

Quick Wrap Up

You are undoubtedly already aware of the changes that have been made to the tax legislation; for example, you are unable to deduct losses from other income, but you are permitted to deduct losses from any future income you earn from holiday rentals. This change was made effective for tax years beginning after December 31, 2017. As a result of this, it is nearly always a sound decision to seek the advice of an expert in the field.