Got A Holiday Home? An Introduction To Tax

If you rent your holiday home, you’ll need to complete a Self Assessment tax return like any other letting. But if the property also qualifies as a furnished holiday letting (FHL), there may be a number of tax benefits available to you.

Here, we guide you through how to meet the FHL conditions and the tax advantages.

What qualifies as an FHL?

For a home to be classed as an FHL, it must be furnished, let commercially, and situated in the UK or European Economic Area. If the property is rented out of season so as to cover costs but you didn’t generate a profit, the letting will still be considered commercial.

There are also three occupancy tests the property needs to pass to be classified as an FHL. The first two are that, in the given tax year, the holiday home should be available to let for over 210 days, and let to the public for at least 105 days. For the second test, the days where you let to family and friends at reduced rates aren’t included, and nor are those where a single letting surpasses 31 days.

If the lettings over 31 days cause you to exceed 155 days in a tax year collectively, then regardless of the second test being passed, this third test would disqualify the property. If not all of these conditions are met, the property will be treated as normal rental income instead.

Exceptions

Situations may arise which allow your property to qualify as an FHL even if it fails the occupancy tests. For the second test, you’ll be able to count lettings surpassing 31 days if the reason is because of unforeseen circumstances, such as the holiday maker being unable to leave in time due to falling ill or having an accident, or experiencing a delayed flight.

Your property could also pass the first occupancy test by using the averaging election or a period of grace election. The former is where you let multiple holiday homes, and the test is applied to them collectively. This involves working out the average rate of occupancy. You could, for example, have four homes rented for a total of 448 days, but one was let for 60. The average is 112, allowing the disqualifying property to be counted as an FHL.

The period of grace election is where you’re unable to meet the conditions, but can demonstrate you had a genuine intention to. The property must have qualified as an FHL the preceding year, and you can make a second period of grace election if the conditions aren’t met the following year. After this, unless you can take advantage of the averaging election, it won’t qualify as an FHL.

FHL tax advantages

For holiday homes that are FHLs, you can claim Capital Gains Tax relief (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders). You can also claim plant and machinery capital allowances for items like furniture, equipment and fixtures. The profits you make from letting holiday homes will count as earnings, which will be beneficial for pension purposes.

If the FHL isn’t used for the entire year, all expenses can be deducted as long as you don’t live in it. In the situation where only parts of the property were rented, or there was private usage, then you’d need to calculate the proportions of the expenses that attribute to this before deducting them. Where an FHL makes a loss, you can set it off against its profits in later years.

Only one property page is needed on your Self Assessment tax return, too, if more than one of your properties qualifies as an FHL. Completing this and working out the tax is where many struggle, but this doesn’t have to be the case. GoSimpleTax does the calculations for you.

Our tax return software allows you to submit your data on the go, adjusting the tax owed instantly and providing tax-saving suggestions. To discover the benefits for yourself, register for a free trial today.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.