Owning a holiday home can be both personally and financially rewarding. Your family and friends have a holiday cottage to enjoy with the running costs covered by the holiday rental income.

HMRC has a special set of tax rules for Furnished Holiday Lets. Our guide aims to give an overview of these tax rules which can provide substantial financial benefits for UK holiday home owners.

What is a Furnished Holiday Let?

A Furnished Holiday Let (FHL) is an HMRC definition of a certain type of rental property. The property must be located in the UK, Ireland or EEA countries. It will be let out to paying guests for short durations only. ie. weekend breaks and holidays.

This is fundamentally different to a buy to let property where the paying guests are tenants who will occupy the property as their main residence for much longer periods of time.

Read more on What is a Furnished Holiday Let?

How to qualify for Furnished Holiday Let status

HMRC have very specific criteria for a property to ‘qualify’ as a Furnished Holiday Let and without this qualification the property naturally cannot utilise the FHL tax conditions.

We will cover the points in more detail but essentially your holiday let needs to be let out to paying guests during each 12 month period with the aim of earning rental income and making a profit.

To make sure your property qualifies as a furnished holiday letting, it must be:

• in the UK or EEA
• fully furnished
• available for commercial letting to the public, as holiday accommodation, for at least 210 days a year
• commercially let as holiday accommodation for at least 105 days a year – the rent must be charged at market rate and not at cheap rates to friends and family, and
• a short term letting of no more than 31 days

Located within the UK or EEA

Very simply your property must be located in the UK or the European Economic Area (EEA), which includes Iceland, Liechtenstein and Norway.

Fully Furnished

Your holiday let needs to be furnished so that holidaymakers have everything they would expect from a self-catering holiday cottage.

Available for Commercial Letting

You need to be able to demonstrate that you are actively marketing your property as a holiday let and is it available to book for at least 210 days each year.

Let out to Paying Guests

You need to have guest bookings for at least 105 days a year with rent paid at the ‘market rate’. Any times that your family or friends use the property will not be counted.

Short Term Lets

A FHL property can be let for periods longer than 31 days in one stretch but none of these days will count towards the above test. This is known as ‘longer term occupation’. Where the total of all ‘longer term occupation’ is more than 155 days in the tax year, the property will not qualify as a furnished holiday letting.

Elections

If you let more than one property as a Furnished Holiday Let, and one of those properties does not meet the 105 let days condition, you can elect to apply the condition to the average rate of occupancy for all the properties you let as FHLs. Alternatively, you may make the period of grace election for the property to continue to be treated as an FHL for a maximum of 2 consecutive years if you have not met the letting criteria in a year and meet all of the following conditions:

• genuinely intended to meet the letting conditions
• have marketed the property to the same or greater level than in successful years
• met the conditions to qualify as an FHL in the previous year

Tax advantages of Furnished Holiday Lettings

The tax benefits of qualifying as a furnished holiday let are:

• You can claim capital allowances
• You may be able to benefit from some favourable capital gains tax rules when you sell or ‘otherwise dispose’ of the property such as Business Asset Rollover Relief, Entrepreneurs Relief, Relief for gifts of business assets

Furnished Holiday Let Council Tax

Because a holiday let is classed as a business you are able to re-register the property for business rates. This is not available for buy-to-let investors who continue to be liable for council tax even when the property is empty.

You may be able to claim Small Business Rate Relief, which will reduce the amount of council tax/business rates you will have to pay

Holiday Let allowable expenses

A holiday let is treated as a business by HMRC for tax purposes whereas a buy to let is regarded as an investment. Owners of qualifying holiday lets can deduct the full cost of their mortgage interest against income.

The running expenses relating to the property can be taken into account when calculating your taxable profits. Such as;

• letting agents fees
• accountants fees and certain legal fees
• mortgage interest (full relief)
• building and contents insurance
• maintenance and repairs to the property, and
• utility bills, council tax, business rates, ground rents and service charges

What paperwork should you keep?

In order to be able to complete the land and property pages of your tax return 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
• sales receipts, invoices and bank statements

All of these records must be retained for six years after the tax year concerned.

Further reading

There’s lots of information on the HMRC website regarding furnished holiday lets. The page below is a good place to start to become more familiar with the rules.

https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2020