Tax on furnished holiday lettings
Tax on furnished holiday lettings
If you let out a furnished holiday home in the UK or the European Economic Area (EEA), you may be entitled to certain tax advantages. However, your property must meet some rules to qualify.
Rules for furnished holiday lettings 2012-13 tax year
To make sure your property qualifies as a furnished holiday letting, it must be:
- in the UK or EEA
- available for commercial letting to the public, as holiday accommodation, for at least 210 days a year
- commercially let as holiday accommodation for at least 105 days a year. The rent must be charged at market rate - not at cheap rates to friends and family.
- mainly short term lettings of no more than 31 days.
Tax advantages of furnished holiday lettings
The tax advantages if your property qualifies as a furnished holiday letting are:
- You can claim capital allowances
- You get the benefit of some favorable Capital Gains Tax rules when you sell or 'otherwise dispose' of the property.
If your property doesn’t qualify
If your property doesn't qualify as a furnished holiday letting - for example you own a holiday villa outside of the EEA or you don't let it out for enough days - you'll be taxed under the normal residential property lettings rules.
Working out your taxable profit
Your profit on furnished holiday lettings is worked out in the same way as for other rental income. The only difference is you can claim 'capital allowances' rather than the 'wear and tear' allowance that other rental businesses receive. Examples of expenses that qualify for capital allowances include the cost of furnishings and furniture and equipment, such as refrigerators and washing machines.
You work out your 'net profit' as follows:
- add up all your rental income
- add up all your 'allowable expenses'
- take your allowable expenses away from your income
If you have more than one residential letting, you group all the income and all the expense figures together.
To arrive at your taxable profit deduct your capital allowances.
The expenses you can deduct from letting income (unless it's under the Rent a Room scheme) include:
- letting agent's fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountant's fees
- buildings and contents insurance
- interest on property loans
- maintenance and repairs to the property (but not improvements)
- utility bills (such as gas, water and electricity)
- rent, ground rent, service charges
- services you pay for, such as cleaning or gardening
- other direct costs of letting the property, such as phone calls, stationery and advertising
You can only claim expenses that are solely for running your property letting business. If the expense is only partly for running your business (or if you use the property yourself) then you may only be able to claim part of it.
One expense that many people miss out on is the claim for interest on property loans. Many believe that if the loan used to buy their holiday home is secured on their own house, they cannot claim the interest as an expense against the letting income. If the loan is used to fund the purchase of the holiday home, then interest can be claimed – it does not matter what property is used as security.
When you work out your profit, you can't deduct:
- 'capital' costs, such as furniture or the property itself (you can claim capital allowances instead).
- personal expenses - costs that aren't to do with your letting business
- any loss you make when you sell the property
How much tax will you pay?
Your taxable profit from property letting is added to your overall income. If this is more than your tax allowances you'll pay tax on it at normal Income Tax rates.
If you let property jointly
If you let property with someone else, when you fill in your tax returns you should each show your share of:
- the income and expenses
- the profit (or loss)
The help notes for your tax return explain how to do this.
If you make a loss
You can carry a loss forward and offset it against future letting profits. If you have a UK holiday home the losses can only reduce the future holiday let profits of the UK holiday home. If you have an EEA holiday let the loss can only reduce future EEA holiday let profits. You cannot use a holiday let loss to reduce your other taxable income. These rules about losses are new for 2011-12.
Capital Gains Tax
If you sell or 'otherwise dispose' of the property, you may be able to take advantage of Capital Gains Tax reliefs, such as 'Business Asset Roll-Over Relief' (which allows you to to defer payment of Capital Gains Tax by reinvesting the sale proceeds within three years in certain other business assets), or ‘Entrepreneurs Relief (which can reduce your rate of Capital Gains Tax from 28% or 18% down to 10%).
What paperwork do you need to keep?
In order to be able to complete your tax return you need to keep:
- a note of all the rent you receive and the dates you rent out the property
- a record of your business expenses
- sales receipts, invoices and bank statements
- all these records for six years after the tax year concerned
If you have any questions on the taxation aspects of holiday lettings contact Robert Stone at email@example.com or telephone 01460 55661
Category: Company News