Furnished holiday lets (FHLs) have been increasing in popularity in recent years. When you think about how commonplace it is now to use letting sites such as Airbnb and VRBO, it’s easy to see why. 

It’s not just their relative ease that makes FHLs attractive. They also benefit from various tax advantages, which means they can be a particularly attractive source of income. 

But the rules for FHLs changed last year (April 2021) to prevent people passing off their second homes as holiday homes.

Here’s our brief guide on what you need to know about owning an FHL.

Tax reliefs available to FHLs 

FHLs are classified as a ‘trade’, so they benefit from the same tax reliefs available to regular trading businesses.

One of the most generous of these tax benefits is the small business rates relief. This allows the trade (or FHL) exemptions from business rates, which in some cases can be 100% relief. 

FHLs are also eligible for capital allowances. This means that the cost of all the furniture, equipment and fixtures in your property can be deducted from your pre-tax profits as allowable expenses. 

So, you can make improvements to your lovely holiday let, potentially increasing its rental income, and make a tax saving while doing it.

When you come to sell your property, an FHL may also qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). This limits the capital gains tax (CGT) you’ll pay to 10%, even if you would normally pay it at 20%. 

Other CGT allowances may also be available, including rollover relief.

Changes in the rules from April 2023

Second-homeowners capitalised on the tax opportunities during the pandemic when the UK was adjusting to ‘staycations’. 

There’s nothing wrong with that in principle, but it has led to some unusual tax consequences. 

Normally, the owner of a second home will pay council tax on their property. But if it’s classified as an FHL, then no council tax is due. 

Taking into account the small business rates relief for FHLs, that meant many owners paid neither council tax or business rates on their properties.

It was even possible to declare an intention to let the property, and benefit from the tax reliefs, while never actually letting it out – there were no checks and balances in place to police it. 

But from April 2023, second homeowners will need to prove that their lets are rented out for a minimum of 70 days a year before they can access small business rates relief. 

That will involve providing evidence of the let, with receipts and letting details, as well as proof of the ways in which you advertise the property (a website or brochure, for example).

How to qualify as an FHL

To be classified as an FHL, a property must be situated in the UK or the European Economic Area (EEA). It must be furnished and let on a commercial basis – i.e. you make a profit from the property. 

If those criteria are met, the following conditions need to be satisfied:

  • Availability: the accommodation is available for commercial letting as holiday accommodation to the public for at least 210 days a year.
  • Actual rentals: The accommodation is actually let out to the public for at least 105 days. There’s some leeway here with a grace period if your property meets the requirement in some years but not others. You can elect to apportion the rental days between properties if you own more than one FHL.
  • Length of stay: the accommodation must not be let for periods of longer-term occupation (normally 31 days or more) for more than 155 days during the year.

This is a complicated area of tax – and if overseas properties are involved, even more so. 

Running FHLs does come with advantages if you get it right but could be costly if you fall foul of the rules. 

If you’d like any help with applying the tax rules for your furnished holiday let, get in touch with one of our advisers.