Unless the income meets the Furnished Holiday Accommodation (FHA) criteria, short-term property rentals are usually seen as ordinary rental income. Please continue reading for more information about short term lets.
An overview of Furnished Holiday Accommodation
To qualify as an FHA, your property must be:
- In the UK or the European Economic Area (EAA) – the EAA includes Norway, Iceland and Lichtenstein
- Furnished – there must be sufficient furniture provided for usual occupation and your visitors must be allowed to use the furniture
The property must be commercially let with the intention to make a profit from the income. If the property is let out of season to cover costs, but no profit is made, it will still be seen as commercial.
Accommodation can only qualify as an FHA if it passes all three occupancy conditions: the availability condition, the letting condition and the pattern of occupancy condition.
Please visit the Fusion Business Services guide on Furnished Holiday Lettings (FHL) for more information. Further information is also available on the government’s website.
Rules (Short term lets)
Where the furnished holiday let criteria are met, the following rules apply to the rental income:
- There are no restrictions on mortgage interest relief.
- The income is treated as earnings for pension purposes.
- Capital Allowances are available.
- There is no potential to claim certain Capital Gains Tax Reliefs (gift relief, Business Asset Disposal Relief, etc.) which aren’t available on normal rental properties.
You must pay tax on any profit you make from renting out the property after the tax-free allowance of £1,000. For more information, please visit the government’s website. Please be aware that you cannot claim this allowance if you are also claiming rent a room relief. If your income from short lets qualifies for rent a room relief, you could claim a tax-free allowance of up to £7,500 per year.
If you are a non-resident and in receipt of UK rental income, this income falls within the scope of UK income tax. You must report the income to the HMRC unless the HMRC has agreed that this is not required. For example, if your only income was rental income below your tax-free personal allowance, then HMRC may decide that you are not required to file a UK tax return. You must, however, get the prior approval of HMRC before this option applies to you.
Alternatively, if you are a UK resident receiving foreign rental income, you can be taxed under the arising or remittance basis. If you are taxable under the arising basis, you must report your worldwide income on your UK tax return. However, if you are taxable under the remittance basis, overseas income is not taxable or reportable in the UK so long as it is not remitted to the UK.
Additional taxes may apply
You may also be liable for the following taxes:
- Council tax is levied on properties, and the rates will vary based on your property area and size. However, you could qualify for a 50% discount for FHA properties, but you will need to apply for this directly with the local council.
- Capital Gains Tax is due when you dispose of the property. However, you could benefit from tax relief for selling your primary home.
- If you are a non-resident and you are selling a UK property, you must submit a separate non-resident capital gains tax return within 30 days of completion of the sale. Payment is also due within 30 days of completion. However, if you are filing a standard UK tax return, payment can be deferred until the normal deadline of 31 January.
- Standard VAT rules will apply if you are letting short term accommodations such as on Airbnb. You must also register for VAT and charge VAT from customers if your total threshold goes above the mandatory VAT registration limits.
Are you a landlord looking for a dedicated landlord accountant?
Fusion Business Services has an expert Landlord Accountancy team to help you manage your property portfolio. To schedule a free consultation or to discuss how Fusion Business Services can help you set up and assist you with the running of your SPV company, please call 0800 229 4020. We also provide a landlord accountancy service for those who would prefer not to have an SPV (landlord accountancy with self-assessment).
