The world of property rental can be complex and confusing, particularly when it comes to tax. While buy-to-let (BTL) investments are often the first thing that comes to mind when people think of property rental, holiday lets are becoming increasingly popular in the UK due to their unique tax benefits. In this blog post, we’ll explore the advantages and disadvantages of furnished holiday lets and how they differ from BTLs.
Advantages
Mortgage interest relief
Perhaps the most significant tax advantage of furnished holiday lets over BTLs is that the full mortgage interest (section 24) can be deducted from the profits of the former. This means you pay less tax and retain more of your profits--which is music to any investor’s ears. On the other hand, residential landlords can no longer claim relief on their mortgage interest.
Capital allowances
Another tax benefit of furnished holiday lets is that certain capital allowances are available to owners, which cannot be claimed for typical BTLs. These include the costs of refurbishing or upgrading the property, plus furniture, fixtures, and equipment to kit out the property to a luxury standard. Capital allowances can be offset against income, which means you pay less tax and can retain more profit.
Pension Contributions
The income generated from a furnished holiday let is classified as Net Relevant Earnings (NRE) for pension purposes, which allows owners to make tax-advantaged pension contributions. This is a significant advantage over traditional BTLs since, according to current rules, the income from BTLs isn’t classified as NRE. By contributing to a pension fund, owners can reduce their overall tax bill and increase their retirement savings.
Capital Gains Tax
When it comes to selling a furnished holiday let, certain capital gains tax (CGT) reliefs are available. These include Entrepreneurs relief, Business assets disposal relief, Business assets rollover relief, Gift hold-over relief, and more. These reliefs are not available for typical BTLs and can help reduce the CGT liability significantly.
Business Rates
One of the potential downsides of furnished holiday lets is that they’re considered trading businesses for tax purposes and thus taxed accordingly. While this can be either advantageous or disadvantageous. If you have one property you will likely qualify for Small Business Rate Relief, allowing you to waive any council tax or business rates payment.
Disadvantages
VAT Implications
Once your holiday let income exceeds £85,000, you must register for VAT, leading to significant implications on your profits and pricing, ultimately resulting in an additional 20% charge on the cost of your holiday let.
Wear and Tear
Unlike a buy-to-let, a holiday let is subjected to a higher number of occupants who may cause severe wear and tear on your furniture and appliances. This constant activity may necessitate frequent replacements.
More Work
Owning a holiday let requires more daily effort, including promoting your rental, managing a booking calendar, and dealing with customer inquiries and issues. Let Coast Holidays take the hassle out of hosting.
In conclusion, furnished holiday lets offer several tax advantages over BTLs, including full mortgage interest relief, certain capital allowances, and pension contribution benefits. However, owners should also be aware of the potential disadvantages, such as the higher business rates and the requirement to pay income tax on profits. Ultimately, it is important to consider your personal situation and investment goals when deciding whether furnished holiday lets are right for you.