Author: Matthew Jeffery, Tax Director
The Office of Tax Simplification (OTS) published a report in November calling to scrap the preferential tax treatment offered to holiday letting businesses. If these recommendations are accepted, there is the possibility of a complete reform to the existing Furnished Holiday Let (FHL) regime, forcing owners to pay tax on their earnings in the same way that a traditional Buy-to-let (BTL) landlord does.
In recent years the number of BTL landlords converting properties into short term lets to take advantage of the favourable tax treatment has risen sharply. But this has been met with political pressure given the rapid growth of the number of holiday homes in sought after locations.
The report states that there are around 127,000 furnished holiday lettings businesses owned by individuals declared to HMRC in personal tax returns, including 17,000 relating to properties outside of the UK but within the European Economic Area. However, respondents felt this represented only a “small core of people running a substantial short-term letting business, and a long tail of second-home owners renting one property.”
More than 3,500 people were surveyed by the OTS on how the taxation of income from property might be simplified and found that respondents were “neutral” on the benefits of the holiday lettings regime, compared with its administration, and those who were positive felt “the scope of who was included was too wide”.
Presently, FHL businesses can obtain the following benefits compared to traditional property rental businesses:
- Lower Capital Gains Tax on the sale of a property.
- Capital allowances can be claimed on equipment and for fixtures acquired with or installed in the property.
- Full income tax relief for mortgage interest deductions.
- Ability to make pension contributions to reduce tax.
- Income from a jointly owned FHL by a married couple/civil partnership can be split in any proportion they choose. Whereas BTL couples have a mandatory 50:50 split.
The report findings recommend that the Government consider whether there is a continuing benefit to the UK in having a separate tax regime for furnished holiday lettings. The OTS recognises that removing the furnished holiday lettings regime could put pressure on the boundary between whether a taxpayer has a property business or a trade, as many would currently use that regime as a proxy for many of the benefits of the trading rules.
However, getting rid of the additional benefits could ultimately mean that FHL owners would consider selling up if running the business becomes less commercially viable. This would be hugely damaging for the short-term letting industry.
Perhaps the good news for landlords anxious about possible tax rises, is that the Office for Tax Simplification is likely to be abolished by the Government – one of the few proposals in the recent mini-Budget that has not been reversed. Furthermore, it is not uncommon for the Government to discount OTS recommendations.
Owners of FHLs should now consider what reliefs are available to them before they risk missing out should any changes to the regime be implemented. One such relief is to claim on the embedded fixtures found in and under the building when they bought, built, refurbished or converted it from a residential property. Allowances identified are typically around 20-40% of the costs incurred – equating to an average tax saving of £25,000, according to the tax experts at Zeal.
Matt Jeffery, MD of Zeal added:
“The benefits of making this one-off claim includes a substantial pool of tax savings that can be used to mitigate tax payments for several years – many even receive a cash rebate for tax they have unknowingly overpaid or have their upcoming tax bill completely eliminated.
But owners would be wise not to hold off on making these claims or risk the recommendations from the OTS being implemented and their window of opportunity to save tax is closed forever.”
This article was written by Zeal Tax, a leading capital allowances specialist in the UK, as an educational piece to help holiday letting business owners understand their tax relief entitlement.
Zeal are Chartered Tax Advisors that specialise in helping businesses claim this tax relief and are rated ‘Excellent’ on Trustpilot. Furthermore, Zeal operate on a success fee basis with no upfront costs and provide a free property survey. Unlike other advisors, Zeal also complete all the tax calculations, submit your claim and deal with HMRC on your behalf.
Get in touch with a member of the team to see if we can help you save tax on your holiday let business!