Tax Advantages of Furnished Holiday Lets
Many people already know that Furnished Holiday Lets (FHLs) benefit from many tax advantages when compared to long-term rental properties. For example, they famously benefit from Entrepreneurs’ Relief (ER), which means that the capital gain on a sale of a Furnished Holiday Let is taxed at 10% rather than the residential rates of 18% (basic rate) or 28% (higher rates).
However, as mortgage interest tax relief restrictions continue to bite in an increasingly jittery property market, it may be worth revisiting the Furnished Holiday Lets tax reliefs and checking if FHL status is viable.
For the current tax year (2019/20), only 25% of mortgage interest will be an allowable expense, with the remaining 75% only available for basic rate relief. The Furnished Holiday Let status is therefore more valuable than ever because, it is perhaps a lesser known fact that, FHLs have the additional advantage of not being subject to the mortgage interest restrictions. This means that any mortgage interest costs are fully deductible from rents derived from the Furnished Holiday Let.
Bearing the above in mind, it may be worth landlords reviewing their letting arrangements to see if any of their properties can be restructured to becoming short-term lettings in order to meet the annual qualifying conditions (broadly the property must be in the UK/EEA, it must be let for 105 days and available to let for 210 days and most lettings should not exceed 31 continuous days).
For many buy-to-let landlords who have been hit hard by the mortgage interest restrictions, this could be a more attractive option than selling their buy-to-let properties in an uncertain property market.
Ultimately, this is a decision that has to be assessed after taking account of each property’s individual facts. A landlord may prefer the security of having long-term tenants over the often erratic seasonal nature of holiday lettings.
Geography will also play a factor. For example, a two-bedroom flat in Wolverhampton is less likely to be a realistic FHL proposition than a holiday cottage in rural Cumbria. However with Liverpool’s increasing popularity as a tourist destination, it may well be a feasible alternative to the traditional buy-to-let model for this region.
Remember, as with all things tax, it does pay to seek good professional advice.