What’s the latest on Income Tax for Furnished Holiday Lets?
Qualifying FHLs are considered to be trading businesses for both income tax and CGT purposes. So whilst income from a furnished holiday let is declared as property income on the owner’s tax return, it is actually treated as trading income.
The starting point is that income received from an FHL is subject to income tax at the owner’s marginal rate. For the 2019-2020 tax year, the income tax rates are as follows:
Distinctions between FHLs and regular buy-to-let properties when calculating taxable income
There are a number of important distinctions to be made between FHLs and regular buy-to-let properties when calculating the owner’s taxable income.
Firstly, many traditional landlords have been hit by the introduction of legislation which applies from April 2017 restricting the amount of income tax relief available for finance costs of a let property. Prior to April 2017, the traditional landlord could deduct 100% of the mortgage interest against his/her income but this has been slowly reduced such that, by 6 April 2020, relief will be restricted to the basic rate of tax.
Another important distinction is that owners of FHLs are unaffected by the removal of the ‘Wear and Tear allowance’. Prior to April 2016, traditional landlords could claim up to a 10% deduction of the net rent to account for the normal wear and tear on furniture and white goods but this has since been replaced with ‘Replacement Domestic Item’ relief which restricts the tax relief available to the actual replacement of furniture and other domestic items by landlords.
However, as a trading business, FHLs are entitled to claim capital allowances on equipment and fixtures. Capital allowances can be claimed on moveable items (furniture, appliances, kitchenware, etc) as well as fixtures and integral features in the building (sanitary ware, electrics, fitted carpets, etc). This means that owners of FHLs are able to claim tax relief for the initial furnishing of a FHL property, as well as when items are replaced.
It is important to note that where the property is used by the owner for private purposes, the allowances will be restricted to reflect the private use.
Finally, as distinct from other letting income, profits from an FHL are treated as earned income for the purposes of pension contributions. This can be particularly useful for owners who have limited earnings as it will increase the level of tax efficient pension contributions which can be made each year.
To benefit from these income tax advantages, it is essential that the property meets all the qualifying conditions for FHLs. For further details on the qualifying conditions and the CGT advantages for FHLs, see our previous article ‘What’s the latest on Capital Gains Tax for Furnished Holiday Lets’.
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