Tax implications of holiday lets

The coronavirus pandemic has seen holiday makers fall in love once again with UK as a vacation destination, and with it a growth in holiday homes.

The property agency Savills reports that there are more than 300,000 second, or holiday homes in the UK. It is seen by many as a sensible investment and an asset class that is growing, with homeowners adding holiday accommodation in all manner of creative ways from shepherd huts, hobbit homes and converted agricultural buildings.

Holiday lets are quite clearly defined by HMRC and it perhaps helpful to clarify first what it considers as a holiday home.

A holiday home must be furnished for normal habitation and must be commercially let with the intention of making a profit.

The property must be available to rent for at least 210 days in each tax year with the property let for at least 105 days. Lettings to family and friends at a reduced or zero rent and any lets exceeding 31 days will not count towards those 105 days.

If a property is not let for 105 days in a tax year, the owner has two options. If they own more than one holiday let, they can average out the let days across those properties. If they own just the one, there is what HMRC calls a ‘grace election’ allowing days to be pulled across from previous or subsequent years.

A holiday home will stop being considered a holiday home if in permanent occupation, if sold or if the number of let days are not met.

Holiday lets are considered a business by HMRC, as opposed to buy-to-let properties which if held by an individual it considers an investment. This gives holiday lets a tax advantage in a number of areas.

Capital allowances

If developing a new holiday let, perhaps converting a redundant agricultural building, it will be possible to claim capital allowance tax relief against future profits. Capital allowances will extend to the ‘plant and machinery’, which in the case of property will include heating and sanitary wear. They can also be claimed against white goods. Capital allowances can be used to offset tax on profit from the holiday let and are not time limited.

Mortgage Interest Relief

Following a gradual reduction in the relief for mortgage interest for normal buy-to-lets and the impact this has had on landlords, it may surprise you to learn that qualifying holiday lets do still benefit in full from relief against mortgage interest. This can make a real difference to the profitability of your letting business.

VAT

Normally longer term letting income is not subject to VAT. Income from property follows the treatment of the building itself, and whether on not the owner / purchaser decided to opt to tax or not.

Holiday lettings income is however VATable. Most individuals owning one or two holiday lets may never have thought of VAT issues, however if their annual turnover from holiday lettings exceeds the VAT registration threshold of £85,000, they need to register and charge VAT on their rents, paying this over to HMRC quarterly. Whilst this would increase the rents they charge, it will allow for them to claim back VAT incurred on any expenditure relating to the letting.

Business rates

Holiday lets do not typically attract council tax, but will need to pay business rates.

With Covid affecting holidays significantly, with the national lockdowns putting a stop to staying away overnight, business rates relief was applied throughout the year to these businesses.

In addition, local councils are offering grants to affected businesses. There is a short window of opportunity to apply prior to 31 May 2021 for the final grant round.

When you sell

As a business, sales of holiday lettings can attract business rollover relief, meaning that you do not have to pay any Capital Gains Tax (CGT) as long as you reinvest the proceeds of sale into another qualifying business asset. Equally if you have just sold out of another business, you may be able to roll over the capital gain into the purchase of a holiday let property, paying no CGT until it is eventually sold.

If you have no intention of reinvesting once you sell your holiday letting business, you may qualify for Business Asset Disposal Relief (subject to meeting a number of different criteria) which restricts the CGT rate to 10% on the gain, compared to 28% for normal buy to let gains.

As you can see there are a number of advantages to holiday lettings compared with buy to lets and with the UK staycation market predicted to boom for the next few years, it might be worth a look.