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Furnished holiday homes may be a significant source of income. However, in order to maximise your additional income, it essential to understand the tax impact on income from holiday lets.
Renting property as a “staycation” or holiday home over seas is subject to different tax liabilities than landlords that invest in buy-to-let -properties. Standing holiday lets are excluded from certain tax liabilities that other property types are not.
The questions and answers below will help you get the most out of tax breaks for renting out your home for a holiday.
For taxation purposes, a holiday let must fulfil the following criteria:
- The property must be furnished and habitable
- Let through commercial channels as a profit-making business
- Situated in the UK or EEA
- Must be available to let for at least 210 days in any tax year (meaning you or your family members cannot live in it for more than 155 days a year)
- The property must be let for at least 105 days (excluding friends and family)
When a property is not let for 105 days in any one tax year, HMRC will allow you to pull days from the previous year (known as ‘grace election’) or if you have more than one holiday home, you can use all your properties to accumulate 105 days for each of your holiday lets.
No. Once you accept an occupant or several occupants that stay for more than 31 consecutive days and a total number of days exceeding 155 days, the property is classed as a buy-to-let rather than a holiday home.
Holiday lets are treated as a business for tax purposes. Buy-to-let properties are classed as an investment. As a business, you are entitled to more tax reliefs on the proviso that you are expected to have more overheads. i.e marketing, less income that could be used to pay the mortgage. You could argue that buy-to-let also have these overheads and earn more or less the same profit margins as you do renting a holiday home. This is not beyond the realm of possibility, but we don’t make the rules, we only report them.
The following items can be claimed as tax relief against capital allowances.
- Marketing costs
- End-of-tenancy cleaning
- Wear and tear
- Furniture, fixture and fittings
- Kitchen and bathroom refurbishment
- Conversions
- Installation of white goods
If your income from renting holiday homes exceeds £85,000, you are obligated to register your business for VAT with HMRC. You, therefore, have to choose whether to absorb this cost yourself or pass it on to your customers. The latter makes your rental costs higher and may be less competitive.
If you sell a holiday letting you may be have to pay Capital Gains Tax (CGT) which is 10% of your profits. However, if you reinvest the funds you get from the sale into another qualifying business asset, you should be entitled to Business Asset Rollover Relief.
Holiday lets are treated as a trading business so qualify for pension funds. This gives you the option to claim for tax relief awarded to pension contributions.
Holiday lettings also qualify for Business Property Relief so can be used as a tool for estate planning to avoid your loved ones paying costly inheritance tax.