If you are in the fortunate position to be able to invest in property, you are probably weighing up the pros and cons of each investment strategy, whether that’s a holiday let, buy-to-let or serviced accommodation. With the increase of costs around BTL properties and increased legislation, it may be worth considering holiday lets as a strong option as other strategies are decreasing in profit. But what are the tax benefits of investing in holiday rentals or short-term lets? Check out our summary below:
Under UK tax guidelines, a holiday let is considered a business whereas a standard buy-to-let is considered an investment. This means that both strategies have different tax implications. Owning a holiday let mean that you can deduct the entire cost of mortgage interest regardless of other income (section 24). With buy-to-lets on the other hand, you can only put through 20% of the mortgage interest. This means that owners of holiday lets pay less tax and retain more of the profit than a traditional buy-to-let property.
Claiming business rates over council tax can be advantageous to some holiday let owners, in particular, if you are small. Fully furnished holiday lets are referred to as a business from a tax perspective and are supposed to be let out X days/year or more. So instead of council tax, you are expected to pay business rates. And, if you are running a small business, you may be eligible for “Small Business Rate Relief” which is a cheaper rateable value that reduces your costs. You do not pay both council tax and business rates. Check your local authorities’ website for a more detailed cost analysis.
When you own a holiday let, you can claim certain capital allowances which you can’t on buy-to-lets. This includes capital spent on upgrading a property or spent on any fixtures, fittings and equipment to allow you to kit the property out. All of the above expenses can be offset against income and again mean that you have a smaller tax bill to pay.
Capital Gains Tax Reliefs
As a holiday let owner, you get access to certain capital gains tax reliefs which will reduce your liabilities when selling your property. For example:
• Entrepreneurs relief
• Gift hold-over relief
• Business assets rollover relief
• Business asset disposal relief
Inheritance Tax Relief
Business property relief is accessible to furnished holiday lets and can be offset against inheritance planning.
As an FHL (Furnished Holiday Let) is classed as ‘relevant earnings’ you can then make use of the tax-advantaged pension contributions. This is not possible with buy-to-lets and so allows you to reduce your tax liability by putting more into your pension. This does mean that you receive a lower income now, but in the long term is generally advantageous against tax.
When looking at the positives of FHL in regards to tax, there is a lot more flexibility and options compared to standard BTL. You are able to offset significantly more against tax to ‘reduce’ your overall profit. There are costs associated with FHL as if you earn over £80,000 you have to become VAT registered and there is a lot more work involved from a paperwork perspective. You must monitor how many days the property has been let for, advertise and maintain the property much closer than BTLs.
- The information contained in the above article is accurate at the time of writing, based on our research reports sourced from sources such as Airdna and PropertyData. Rules, criteria and regulations change all the time and so speak to one of our experts to confirm whether the information is up to date. Nothing in this article constitutes financial advice.
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