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Holiday lettings tax Tax information - Holiday let mortgages


Holiday lettings is recognised as a business (generating earned income) by the Inland revenue, unlike other forms of property letting which the Inland Revenue class as investment income (unearned income). There are some valuable tax incentives for letting your property as a holiday home, but there are some specific Inland Revenue rules which you must follow to qualify.

Tax Rules for holiday lettings ( provided by www.direct.go.uk )
 
To make sure your property counts as a Furnished Holiday Let (FHL), it must be:
  • in the UK
  • furnished
  • available for holiday letting to the public for at least 140 days a year
  • actually let as a holiday let for at least 70 days a year (and these must be commercial lets not at cheap rates to friends and family)

The holiday lets must be (both):

  • short term lets of not more than 31 days
  • the only lets over a period of at least seven months

Other restrictions

You can't let the property as a holiday let to the same person for more than 31 days in the year. However, if you meet all the qualifying tests in a seven month period there are no restrictions on longer lets in the remaining five month period. But these longer lets do not count as holiday lets.

 

Working out your taxable profit

Your profit on UK holiday lettings is worked out in the same way as for other rental income, except that you claim ‘capital allowances’ rather than the ‘wear and tear’ allowance. Examples of expenses that qualify for capital allowances include the cost of furnishings and furniture, and equipment such as refrigerators and washing machines.
 

You can learn more about capital allowances and working out profits for UK holiday lettings in the land and property help notes of the Self Assessment tax return. If your property doesn't qualify as a holiday let, you will be taxed as normal for residential property lettings.

Tax advantages of UK holiday lettings
 
With UK holiday lettings, you can realise a tax advantage if you make a loss on your earnings from the property, and when you sell the property:


If you make a loss

Any loss can be offset against your other income, not just the property income, reducing your overall tax bill. Or you can carry the loss forward and offset it against future letting profits. Learn more about offsetting losses in the land and property help notes of the Self Assessment tax return.


When you sell the property

You may be able to take advantage of Capital Gains Tax (CGT) reliefs, such as 'business asset roll-over relief'. For example, if you reinvest within three years in another UK holiday letting property or certain other assets costing the same as or more than you got for the property you have sold, you may be able to defer payment of CGT until you dispose of those new assets.
 
You may also pay less CGT when you sell a property you have used for UK holiday letting, compared with other residential let property (such as buy to let). This is because a UK holiday letting property is treated as a business asset and should qualify for the new entrepreneurs’ relief which has a 10% rate of tax for the first one million pounds of profit.

The amount by which the gain is reduced will depend on how long you have owned the property and how long you have used it for qualifying holiday letting.
 
To understand the rules fully, and find out about other relief's you may qualify for, ask your professional adviser or Tax Office about CGT reliefs on the sale of UK holiday lettings property.
 
How to declare your income and expenses
 
You need to declare your rental income from furnished holiday lettings using the land and property pages of your Self Assessment tax return. If you don't receive one automatically, contact your local Tax Office, or register online at the HMRC website.


Allowable expenses

Some expenses relating to the property can be taken into account to reduce your tax bill. For a detailed list of expenses you can deduct and those you can't, see our related article and the notes to the land and property pages of the Self Assessment tax return.
 
What paperwork do you need to keep?
 
In order to be able to complete the land and property pages you need to keep:
  • a note of all the rent you receive and the dates you rent out the property
  • a record of your business expenses (see the Self Assessment land and property pages help notes for what counts as business expenses)
  • sales receipts, invoices and bank statements
  • all these records for six years after the tax year concerned
 
If you need help completing the pages, call the Self Assessment helpline on 0845 9000 444 (open 8.00 am to 10.00 pm seven days per week).

 

This information is provided as a guide only.
Always seek professional advice from a qualified tax adviser before taking any action.

 

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Capital Gains Tax update - 24th Jan 2008

Capital Gains Tax: Relief on Disposal of a Business (Entrepreneurs’ Relief)

1. The Chancellor today announced a new relief (“entrepreneurs’ relief”) from capital gains tax (CGT) for gains arising on the disposal of a business.

2. The relief will take effect from 6 April 2008 alongside the CGT reform programme announced at the Pre-Budget Report.

3. The relief will be available in respect of: gains made on the disposal of all or part of a business, or gains made on disposals of assets following the cessation of a business by certain individuals who were involved in running the business.

4. The first £1 million of gains that qualify for relief will be charged to CGT at an effective rate of 10 per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.

5. An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1 million of gains qualifying for relief.

Background note and further details
6. At the Pre-Budget Report the Chancellor announced a major reform of the CGT regime. From 6 April 2008 there will be a single rate of CGT of 18%. As part of this change the tax-free annual exempt amount (currently £9,200) will remain, but taper relief and indexation allowance will be withdrawn. Draft legislation relating to the changes proposed at PBR has been published on the HMRC website today.

7. The new relief announced today will reduce gains liable to CGT (at the single 18 per cent rate) by 4/9ths, resulting in an effective 10 per cent rate (5/9ths × 18 per cent). The relief will be available for gains of up to £1 million on disposals of a business by an individual.

8. The conditions for the new relief will be based broadly on the CGT 'retirement relief' (at sections 163 and 164 and Schedule 6 Taxation of Chargeable Gains Act 1992) that was phased out between 1998 and 2003, but the new rules will be simpler. There will be no minimum age limit for entrepreneurs’ relief. And in general entrepreneurs’ relief will be available where the relevant conditions are met for a period of one year, instead of the retirement relief qualifying period of up to 10 years. Draft legislation will be published shortly.

9. The relief will apply to gains arising on disposals of the whole or part of a trading business (including professions and vocations, but not including a property letting business other than furnished holiday lettings) that is carried on by the individual, either alone or in partnership. Where a business is not disposed of as a going concern, but simply ceases, relief will be available on gains on assets formerly used in the business and disposed of within 3 years of the cessation of the business.

10. The relief will also apply to gains on disposals of shares (and securities) in a trading company (or the holding company of a trading group) provided that the individual making the disposal: has been an officer or employee of the company, or of a company in the same group of companies, and owns at least 5 per cent of the ordinary share capital of the company and that holding enables the individual to exercise at least 5 per cent of the voting rights in that company.

The terms 'trading company', 'holding company' and 'trading group' will have the same meaning as they currently do for the purposes of taper relief on business assets. Because of this, there will be no requirement to restrict the gains on shares by reference to any non trading assets held, as was the case for retirement relief.

11. Where an individual qualifies for entrepreneurs’ relief on a disposal of shares or securities under the previous paragraph, relief will also be available in respect of any 'associated disposal' of an asset which was used in the company’s (or group’s) business. For example, if a company director who owns the premises from which the company carries on its business sells the premises at the same time as he sells his shares in the company, the sale of the premises may count as an 'associated disposal' and any gain attract entrepreneurs’ relief. The relief due on an associated disposal will be restricted where the asset in question was not wholly in business use throughout the period it was owned.

12. A similar rule will allow relief on an 'associated disposal' by a member of a partnership who is entitled to relief on disposal of his interest in the assets of the partnership. (Again, relief will be restricted where the asset in question was not wholly in business use throughout the period of ownership.)

13. Trustees will also be able to benefit from entrepreneurs’ relief on gains on assets used in a business. In order for trustees to benefit, a beneficiary of the trust with an interest in possession relating to those assets must be involved in carrying on the business in question, personally or as a partner. In the case of shares such a beneficiary must qualify as an officer or employee of the company in question. The conditions under which trustees qualify for relief will be generally similar to those for retirement relief. In particular, the £1 million maximum limit on gains eligible for relief will apply to the trustees and the qualifying beneficiary jointly.

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