Looking For A Tax Efficient Way Of Buying To Let? What About Furnished Holiday Lets (FHLs)
The government has been cracking down on the tax advantages of buying property to rent out, gradually whittling away at the tax benefits. In a country where house prices are spiralling out of control, it doesn’t seem to make much sense. In contrast, it is more common in Germany for a person to rent rather than buy whereas in England, particularly spurred on by Maggie Thatcher’s selling off council properties in the early ’80s, an Englishman’s home is his castle.
A more attractive solution than buying to let for the savvy UK taxpayer might be Furnished Holiday Lets (FHL). However, there are a few factors which must be considered before you can start getting excited about beachside properties
Qualifying as a Furnished Holiday Let
There are several requirements for a property to be treated as an FHL.
- Most obviously, it must be furnished!
- It must also be available to rent out for 210 days a year. If you wish to spend any time in the property, then these days are excluded.
- It must be Let for 105 days per year
- Stays longer than 31 days are only allowed if the total number of days in a year are more than 155 days.
- The property must be let out on a commercial basis with the intention of making a profit.
- It must be in the UK or in the EEA (European Economic Area) which includes Iceland, Lichtenstein and Norway.
What Are the Tax Benefits of Operating a Furnished Holiday Let (FHL)?
You still need to pay the extra 3% stamp duty when purchasing the property but there tax benefits of running an FHL.
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Interest Payments
If a mortgage is secured on the property, then the full interest amount can be set against the income generated.
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Capital Allowances
Entitlement to capital allowances on furniture, equipment and fittings, including plant and machinery which may be used outside the property such as a lawnmower, tools and a van. (You cannot include the cost of the property itself or the land it stands on).
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Relevant Earnings
Profits are treated as ‘relevant earnings’ which means they can be added to other earnings such as employment for the purpose of putting them into a pension and claiming tax relief. Subject to any restriction such as the lifetime cap.
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Capital Gains Tax
CGT relief is available when you sell the property.
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Business Rates
If the property is based in England and let out for more than 140 days a year then it will attract business rates as opposed to council tax.
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Small Business Rate Relief
If the rateable value is lower than £15000 then it could get small business rate relief of up to 100%.
Conclusion
Apart from the attraction of owning a property which can also be used as a holiday home, (within the restrictions), there are clear benefits of running a Furnished Holiday Let over traditional buy to let.
Acquiring a mortgage is a little trickier as the number of lenders is far fewer. They tend to be building societies who will base their sums on profitability, where 125% – 145% of the interest paid is generated. Deposits also tend to be higher, around 30% (according to the Home Owners Alliance)
However, the tax benefits are clear to see. No ones knows what will happen in the future and maybe the loophole will close, but for now, FHL’s remain an attractive investments opportunity for those with a little excess cash and a real alternative for residential landlords.
Kinsella Tax©
