If you let a property in a popular holiday location, e.g., the south coast, then you could well be operating a holiday lettings business. This is especially the case if your target market is people visiting and staying in your property for short periods of time.
Qualifying Criteria for a Holiday Let
In order to qualify your property as a holiday let, it must be fully furnished; that is, anyone moving into the property must be able to live out of the property without having to buy any additional furniture/furnishings.
It must also satisfy the following three conditions:
- the property must be available to let to the public on a commercial basis for at least 140 days;
- the property must be let for at least 70 days;
- the property must not be occupied by the same individual for more than 31 consecutive days during at least 7 months of the year, which need not be continuous but which includes any months containing any of the 70 let days.
If you have more than one property let for holiday lets, then it is not necessary for each property to actually be let for at least 70 days (in order to meet the 70 day rule), provided that each property meets the 140 day and seven month rules.
You may claim averaging treatment in order to satisfy the ‘actual lettings’ test.
John lets four holiday cottages, and all would otherwise qualify as furnished holiday lettings.
The actual lettings periods are:
Cottage 1 90 days
Cottage 2 78 days
Cottage 3 70 days
Cottage 4 50 days
Total 288 days
288 days divided by four cottages = 72 days.
By averaging all four, all will qualify. Without averaging, cottage 4 wouldn’t qualify.
The averaging claim must be made within 22 months of the end of the tax year to which it relates. In practice, the claim is likely to be made by your tax consultant when completing your tax return for the year.
Calculating your Income Tax on your Holiday Let
Income tax on a holiday let is charged in the same way as if you are operating a normal lettings business, where tax will be liable on any rental profits less expenses.
John buys a three-bedroom property in Bournemouth. His investment strategy is to rent the property in the summer periods to visiting holiday makers.
He offers the property for £250 per week.
Over the financial year, it is let for 35 weeks, which means that he has received a total rental income of £8,750. His expenses are £2,750.
This means that he is liable to pay tax on the £6,000 profit.
Three Generous Tax Benefits Associated With Holiday Lets
Operating a holiday letting business has three significant tax benefits. These are detailed below.
Offsetting losses against other income
If you are unfortunate enough to make a loss in your holiday lettings business, then the loss is treated as a trading loss and can be offset against any other source of income that you have, in the same way as trading losses.
Kiran buys a property for the purpose of holiday letting for £130,000 in 1995.
Her first year of letting is very tough and she makes a £2,500 rental loss.
However because she is employed with a salary of £35,000, she is able to offset the loss against this income.
In other words she pays less tax on her employment income.
Re-investment of capital gains
If you decide to sell your holiday let and make a capital gain, then the profit can be re-invested into another qualifying asset, thus avoiding any immediate capital gains tax liability. This therefore means that you will not liable to pay any capital gains tax, until you dispose of the asset you have re-invested in.
However, you can continue selling and re-investing the profits. By doing this, you will continue to defer any tax liability until the point at which you stop re-investing the profit.
Continuing from the previous example.
Kiran sells her property 5 years later for £230,000, thus meaning she has made a profit of £100,000.
She buys another ‘holiday let’ property in the same tax year by re-investing the profits from the sale and therefore is able to defer any CGT liability.
Business asset taper relief
Because a holiday let property is classed as a business asset, you can claim business asset taper relief. This is more generous relief than non–business asset taper relief.