Before we start its important that you do not treat this as tax advice. We are not tax advisors or qualified to give you any advice. If you need help with any tax affairs we suggest strongly that you consult an accountant or tax advisor.
HMRC have always treated holiday letting properties differently to your main home and residential letting properties. There is a special concessionary status which is available for properties which qualify as FHLs (Furnished Holiday Lets). Historically FHL’s have enjoyed advantageous tax treatment in that they allow certain losses and costs to be offset against other income you may have.
The treatment of holiday lets changed on the 6th April 2011 which removed the ability to offset any losses from your holiday let against other income. However, if you own more than one holiday letting property it still allowed losses from one property to be set against a profit from another.
In 2012 the government made it much harder to qualify for FHL status. For a property to qualify as a Furnished Holiday Let (FHL) it has to be available to let for a minimum of 30 weeks or 210 days per year (previously 140 days). In addition, the property must be commercially let as holiday accommodation for at least 15 weeks or 105 days per year (previously 70 days).
This is an important change as it makes properties that were used as both holiday homes and only let out part of the time commercially much less likely to qualify as a FHL.
There are a number of advantages of FHL status in that it might be possible to claim for additional capital allowances for tax purposes e.g. new fixtures and fittings for your holiday let, administration and professional fees related to the property and your travelling expenses to visit the property.
You might also be able to claim for the start-up costs of setting up the property for a holiday let property.
At the time when the tax change was announced by the government it was feared as being the death blow to the already struggling self-catering holiday let market. As with all these scares the reality was not quite as bad as claimed by the holiday industry. So, if your holiday cottage doesn’t qualify as a FHL it’s not the end of the world.
If your property income is not treated as being from a FHL it reverts to being treated as ‘income from property’ which means that your expenses can still be claimed for tax purposes but is more restricted. A tax advisor will be able to help you with more details
You will not be able to claim tax relief through capital allowances on any new furnishings or fittings for the property. However you can allocate either 10% of the rental less (council tax and water rates) each year as expenses for the wear and tear on the furnishings and fittings. Alternatively you can claim on a ‘renewals basis’. This means you do not claim the 10% allowance but claim the full cost of any replacement of furniture and fittings for the property e.g. carpets, washing machine, dishwasher etc.
The 10% deduction may be better for many people as its easier and means that if you can still claim relief even if you don’t spend the money. A tax advisor will be able to advise the best option in your circumstances
If you should unfortunately die then the holiday let would fall into your estate. The property would be treated at full valuation with no relief allocated to it. This will mean that inheritance tax would be charged on the property.
Please note again that this is not tax advice in any way or form. It is written as a general guide and as with most tax laws they are open to interpretation and professional advise should always be sought before making any decisions.