It has been reported that preferential tax treatment for holiday lettings could be scrapped under the recommendations of a report which has urged the government to reconsider the economic benefits of the sector’s tax regime.
Holiday homes rented for short terms currently benefit from lower capital gains tax on the sale of a property, full income tax relief for mortgage interest deductions, and profits counting as earnings for pension contributions — unlike the arrangements applying to longer-term buy-to-let rentals.
The report by the Office of Tax Simplification (OTS) said the following:
‘The OTS recommends that the government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.’
If the government retains the current scheme, the OTS recommended it remove the current distortion of allowing the regime for properties in the European Economic Area, either by permitting worldwide properties to qualify, or by limiting the regime to UK properties.
FHL VAT rules
In the UK, Value Added Tax (VAT) is a tax that is charged on most goods and services. The standard rate of VAT is currently 20%.
If you own and operate a furnished holiday let (FHL), you may be required to register for VAT if your taxable turnover exceeds the VAT registration threshold, which is currently £85,000.
This means that if the total income you receive from your FHL exceeds this threshold, you must register for VAT and charge VAT on the rental income you receive.
However, if you are below the VAT registration threshold, you can still voluntarily register for VAT.
This can be beneficial if you purchase a lot of goods and services that have VAT included as you can reclaim that VAT from HMRC.
You can claim VAT incurred on certain purchases made before registration. However, it’s important to remember that there is a time limit of:
- Four years before the date of registration for goods you still have
- Six months for services
Furthermore, you can only reclaim VAT on purchases in relation to the business registered.
It is worth noting that there are some special rules that apply to FHLs for VAT purposes.
If you also provide additional services to your guests, such as cleaning or breakfast, these services may be subject to VAT.
Additionally, if you make use of online platforms such as Airbnb to advertise your FHL, you may need to consider the VAT implications of these platforms, due to these potentially acting as an intermediary in the rental transaction.
You can manage your calendar to ensure the VAT threshold isn’t breached, but be wary not to reduce availability so much that you fail the FHL occupancy criteria and rules to qualify for Business Rates and Small Business Rates Relief.
As with all tax matters, it’s important to seek professional advice from an accountant or tax specialist to ensure that you are meeting your VAT obligations correctly.
Recent EU VAT changes
In other news, an overhaul of EU rules is due to impact Airbnb landlords and agents for villa owners across Europe as VAT will be chargeable on all rentals.
The EU’s VAT in the Digital Age programme will have a massive impact on the travel and hospitality sectors, especially for platform operators who host rental apps ranging from accommodation providers like Airbnb and Booking.com, to taxi hailing apps, including Uber, and others.
Any owners of overseas property who rent out their foreign houses and apartments on third party platforms from 2025 will be caught out by the rules, regardless of where they are resident.
Going forward, VAT charges will be passed on to owners by the platform operators. Therefore, it would be sensible to factor an average 20% VAT into the operational cost of rentals.
The EU’s goal for introducing these rules is to create more tax equality as hotels and standard taxi services are all charged VAT on sales while, due to the complexity of VAT registration for individual providers of accommodation and cab services, there is usually no tax charge.
After the implementation of the new rules, the platform operator will be responsible for paying the VAT on behalf of third-party providers as they are the underlying supplier.
Therefore, if the accommodation owner or transport supplier is not VAT registered in the country where the property is, or where the transport is provided, then the platform is liable for the VAT on the supply direct to the tax authorities.
Now that the UK has left the EU, the rules will not be introduced here.
However, it is likely that the Chancellor will be keeping a watchful eye on the EU changes with a view to introducing a similar version of this legislation in due course.
How we can help
With our extensive experience and knowledge of tax regulations and incentives, we can help you maximise your profits and minimise your tax liability.
Our team of expert accountants specialise in FHL tax planning, capital allowances, and investment strategies.
We know the ins and outs of the qualifying conditions for FHL status, and we can help you ensure that your property meets these requirements to take advantage of the significant tax benefits available to FHL owners.
Whether you are just starting out as an FHL owner or are looking to optimise your existing FHL portfolio, we can provide customised solutions tailored to your needs.
Here are our top tips for saving tax on FHLs:
- Meet the qualifying conditions: To be classified as an FHL for tax purposes, the property must be available for commercial letting to the public for at least 210 days per year, and it must be actually let for at least 105 days per year. In addition, the property must be furnished and located in the UK or the European Economic Area (EEA).
- Claim capital allowances: You can claim capital allowances on items such as furniture, fixtures, and fittings that are used in your FHL. This can help reduce your taxable profit and save you money on your tax bill.
- Get VAT advice: It is vital you ensure that you have considered VAT when structuring your FHL business. Could you utilize the flat rate scheme (FRS) or the travel operator margin scheme?
- Claim the Annual Investment Allowance: If you spend money on items that qualify for capital allowances, you may be able to claim the Annual Investment Allowance (AIA), which allows you to deduct the full cost of qualifying items from your profits in the year you purchase them.
- Consider transferring ownership: If you own an FHL jointly with your spouse or civil partner, you may be able to transfer ownership to take advantage of both of your personal allowances and lower tax rates.
- Keep accurate records: It’s important to keep accurate records of all income and expenses related to your FHL, including any capital expenditure, repairs, and maintenance costs. This will help you to calculate your taxable profit accurately and ensure that you don’t miss out on any tax deductions or allowances.
Please note that these are general guidelines, and your specific circumstances may vary.
Contact us today to learn more about how we can help you save money on tax and grow your FHL business.