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In the current economic crisis, if you are thinking about how you can improve your household income, you may wish to consider a furnished holiday let (FHL).

With people choosing to holiday in the UK, holiday accommodation is in short supply so how about renting out part of your own home?

With the popularity of Airbnb, there are good opportunities out there to market your rental accommodation and create an additional income stream. If you rent out furnished accommodation in your only or main residence you can earn gross rents of up to £7,500 per year tax-free through the rent-a-room scheme. This can include a trade such as a bed and breakfast business ran from your own home. If your home is temporarily divided into two or more residential units so that you continue living in one part and renting the second part out then it may be possible to claim rent-a-room however there are various factors that HMRC will consider in deciding if the division is temporary.

For separate rental properties that do not qualify under the rent-a-room scheme, consider running it as a furnished holiday let (FHL). Provided the rental meets certain conditions there will be some tax advantages over the standard letting of a property.

Broadly, FHLs qualify if the tenants are entitled to use the furniture and:

  • The accommodation is available for commercial letting to the public generally as holiday accommodation for at least 210 days in the tax year;
  • The accommodation is commercially let as holiday accommodation for at least 105 days in the tax year; and
  • During the tax year if the same tenant uses the property for more than 31 days these days do not count under point 2 above (unless there are exceptional circumstances). If the total of all lettings that exceed 31 continuous days exceeds 155 days, the property will no longer qualify as a FHL.

For landlords struggling to meet the letting condition of 105 days, possibly as a result of COVID-19 restrictions or due to other circumstances, provided there is a genuine intention to rent out the property it may be possible to make what is known as a ‘period of grace’ averaging election. The property must have met the letting condition in the year before you wish to make the election. You can make the election for up to two consecutive years.

FHLs do not suffer from the restriction of loan interest for residential lettings that was introduced from April 2017. The profits are qualifying earnings for the purposes of making pension contributions. In addition, any capital gains arising from disposals of FHLs may qualify for Rollover Relief, Holdover Relief on gifts or a reduction in the Capital Gains Tax rate from 28% to 10% by claiming Business Asset Disposal Relief.

Spouses and civil partners living together are generally treated as entitled to equal shares of income from jointly held property unless the actual beneficial ownership is different and HMRC have been notified on ‘form 17’. The position is different for jointly owned FHLs as you can choose how you allocate the profits between you for tax purposes.

The provision of a FHL is within the scope of VAT. Therefore, if the income from the FHL exceeds the VAT threshold the owner must register for VAT. Care should be taken if the sole owner of the FHL is also self-employed and making taxable supplies. In this case, the turnover from the sole trade and the FHL must be taken into account in determining whether the VAT threshold has been breached.

For help and advice with your furnished holiday let, contact Ann Bibby on abibby@ellacotts.co.uk or 01295 250401 or watch our webinar on the tax implications of holiday accommodation.

Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.