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What qualifies as a furnished holiday letting?
Before we look at the nuances between furnished holiday lettings and other forms of property lettings, we first need to establish what qualifies as a furnished holiday letting.
HMRC changed the criteria for a furnished holiday letting in April 2022. Firstly, the property must be in the UK or European Economic Area (EAA) and commercially let, meaning that it must be used with the intention of making a profit.
In addition, the property must be available for letting as furnished holiday letting for a minimum of 210 days within the relevant tax year and occupied as a commercial letting agreement for at least 105 days in the year. This does not count any days that you, as the landlord, are staying at the property as this will not then be considered commercially let.
There are also criteria with regards to the lengths of stay for each let. If the total of all the lettings that exceed 31 continuous days is more than 155 days during the year, the property will not be considered a furnished holiday let for that year due to too many lets that would be classed as longer-term occupation as a more extensive stay than a ‘holiday’.
Furthermore, any lets to family or friends at a discounted rate will not be counted towards the 210-day threshold as these will not be considered as commercially let.
Finally, if you let more than one furnished holiday letting, and one of your properties fails to meet the 105-day occupancy requirement, you can elect to apply the letting condition, called the averaging election, which allows you to take an average occupancy of your property portfolio.
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The impact of market conditions
Rather sensibly, exceptions have been introduced for times when a property is not able to be let in the form of the availability condition, like during the coronavirus pandemic. During the tax year 2020 to 2021, where restrictions were imposed in response to the pandemic, holiday lettings were not allowed to be occupied. However, the availability condition could still be considered satisfied if the person had made the property available for letting as furnished holiday accommodation for at least 210 days in the year, even if restrictions prevented the property from being used.
There are other market conditions that can impact the occupancy rates of furnished holiday lettings, such as the weather or the economy affecting the appetite for holiday lettings. If you find that you must close your property for part of the year due to a lack of customers, you are able to deduct expenses such as loan interest and insurance for the whole year, if you are not occupying the property yourself.
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Benefits of furnished holiday lettings
If your property qualifies as a furnished holiday letting, there a few exceptions that do not apply for long term properties:
- You can claim Capital Gains Tax reliefs for traders
- You are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixture
- The profits from furnished holiday lettings count as earnings for pension purposes
In order to benefit from these rules, you will need to separate the profit and loss from your furnished holiday lettings from any other rental business that you obtain income from.
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Challenges with furnished holiday lettings
Current legislation and taxation requirements are set up to support owners of furnished holiday lettings, as they provide a level of protection against aspects of market volatility and the challenges that come with it. However, managing furnished holiday lettings, including their finances, typically poses more operational challenges to landlords.
The payments for individual bookings are often settled in a lump sum a few weeks after the date of stay. This makes the reconciliation process quite time consuming and complicated.
There tends to be a natural fluctuation in the income gathered from short term lets. For example, a beachfront property will have a high occupancy rate in summer months but less so during the winter. This can easily create more stressful periods for landlords, as they manage the peaks of activity.
Most importantly, keeping track of the various time thresholds required to qualify for furnished holiday lettings is, in itself, an organisational challenge. A platform like Hammock can make it easier to keep track of the relevant thresholds, easily reconcile payments and provide landlords with real-time visibility of their property finances.
Legislation changes: Making Tax Digital
Making Tax Digital is an initiative introduced by the UK government to replace the current annual self-assessment submissions. As of April 2024, landlords (who have properties in their personal name) and sole traders earning over £10,000 per year will be required to provide quarterly updates on earnings.
The idea being that it not only helps landlords and their accountants gain better visibility of their ongoing earnings, but it also provides a more accurate picture of taxes across the board.
Moving from one yearly submission to quarterly filings will have a stronger impact on landlords who manage furnished holiday lettings, compared to those whose properties are let on longer term contracts, due to the higher workload required.
* Manoj Varsani is founder and chief executive at property finance platform Hammock *
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