UK Tax Law on Furnished holiday homes is going to change in 2011 and if you rent out holiday accommodation this is going to affect you. So, what are the changes and how do they impact?Current ‘qualifying tests’ to meet the requirements of a ‘Furnished Holiday Letting’ (FHL) are:* Must be available to let for 140 days of the year.
* Must be let for a minimum of 70 days a year.
* No let over 31 days in one go is included in the total.Lets to the same person in one tax year are allowed but they must not exceed 31 days in any one single letting period.If your property doesn’t qualify as a furnished holiday letting, you will be taxed under the residential property lettings rules. At the bottom of the page are links to further reading on many points in this article.What if your holiday villa is in the European Economic Area?From 22 April 2009 HMRC has applied a temporary extension of the current rules to UK taxpayers with property outside of the UK but within the EEA to choose whether they wish to be taxed under:* The furnished holiday letting rules – if the property qualifies
* The normal rules for property businessesThese arrangements will continue to apply for the 2010-11 tax year but it is this change that has caused further examination of FHL tax rules to bring into line both European and UK holiday properties.Working out your holiday home taxable profit:Your profit on furnished holiday lettings is worked out in the same way as for other rental income, except that you can claim ‘capital allowances’.Read our advice about Capital Allowances further down or for more see the links at the bottom of the article.For advice on filling our a Self Assessment form read further down the page.What are the Tax advantages of a Furnished Holiday Letting?There may be a tax advantage if your property qualifies as a furnished holiday letting and either of the following applies:* You make a loss on your rental income
* You sell or ‘otherwise dispose’ of the propertyIf you make a loss:Any loss can be offset against your other income, not just the property income, reducing your overall tax bill; however this is going to be changed in 2011 removing this tax benefit. You can also carry the loss forward and offset it against future letting profits.Learn more about offsetting losses in the land and property help notes of the Self Assessment tax return, see the links at the bottom of this article.
What if I sell or ‘otherwise dispose’ of the Furnished Holiday Letting?You may be able to take advantage of Capital Gains Tax reliefs, such as ‘Business Asset Roll-Over Relief’. For example, if you reinvest the sale proceeds within three years in certain other business assets, you may be able to defer payment of Capital Gains Tax until you dispose of those new assets.To understand the rules fully visit the links below.How to declare income and expenses from your Furnished Holiday Letting.You need to declare your rental income from FHL using the land and property pages of your Self Assessment tax return. If you don’t receive one automatically see the links at the bottom of this article. You should also use the same property pages of your tax return to declare income from furnished holiday lettings property in the EEA.Allowable expenses to offset your profits on a Furnished Holiday Letting.Expenses and allowances on income from property include:* Letting agent’s fees
* Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
* Accountant’s fees
* Buildings and contents insurance
* Public Liability Insurance
* Interest on property loans
* Maintenance and repairs to the property (but not improvements)
* Utility bills (like gas, water, electricity)
* Rent, ground rent, service charges
* Council Tax
* Services you pay for, like cleaning or gardening
* Other direct costs of letting the property, like phone calls, stationery, advertisingIf your annual income from the letting for the tax year 2009-10 is less than £68,000 (before you’ve taken off expenses) you include the total of your expenses on your tax return; if it’s £68,000 or over you need to provide a full breakdown.There are different types of allowance you may be able to claim for your capital costs. Capital costs include expenditure you make on assets like furniture and machinery.If you own a qualifying FHL in the UK or in the European Economic Area you can claim a ‘capital allowance’ for the cost of each item of furniture and equipment you provide with the property or you can claim a ‘renewals allowance’.How much capital allowance can you claim?The allowance depends on what you buy. You can usually claim 50 per cent of the cost when you buy it – but sometimes 100 per cent for some environmentally friendly expenditure. Each year after that you can claim 25 per cent of what’s left. HM Revenue Customs (HMRC) changes the percentages from time to time. The allowance is deducted along with other expenses in calculating your profits. Once you make a choice for each item, you must keep to it.So what’s going to change?These changes are due to come in for April 2011 and are open to consultation until the 22nd October 2010. To take part in the consultation you can email Jacqueline Latter at holiday-lettings-consultation(at)hmtreasury.gsi.gove.uk or visit HM Treasury here to view the consultation document in detail.The major changes to the current holiday letting tax rules are:* Increase the period the property is available to let from 140 to 210 days.
* Increase the actual total let period from 70 to 105 days.
* Restrict the loss relief from FHL so that it can only be offset against income form theFHL business itself. This includes UK FHL being treated separately from EEA FHL. So a loss from a UK FHL can only be offset against a UK FHL and vice versa. The rules allowing offsetting against tax from other areas (like earned income) will be removed.Make sure you can obtain 105 days occupancy level to maximise your tax benefits in 2011The rules about Capital expenditure and Capital gains will remain. How long for is open to debate!What holiday home tax paperwork do I need to keep?In order to be able to complete the land and property pages of your Self Assessment you need to keep:* A note of all the rent you receive and the dates you rent out the property.
* A record of your business expenses (see the Self Assessment land and property pages help notes for what counts as business expenses)
* Sales receipts, invoices and bank statements.
* Allowable expenses
* ‘Capital’ costs
* All these records for six years after the tax year concernedIf you need help completing the pages, call the Self Assessment help-line on 0845 9000 444 (open 8.00 am to 8.00 pm seven days per week).What are ‘Allowable expenses’Your records should include details of all your costs of letting or managing your property. Allowable expenses reduce your taxable profit. They include all or part of these costs:* Letting agent’s, accountant’s and legal fees
* Buildings and contents insurance
* Property loan interest
* Maintenance and repairs – not improvements
* Utility bills, like gas, water, electricity
* Rent, ground rent and service charges
* Council Tax
* Other direct costs of letting the property, like phone calls
What are holiday letting ‘Capital’ costs?You can reduce your taxable profit by claiming different types of allowances for the cost of furniture and equipment you provide with the property.Capital Costs include items used within the property, not used by you personally, such as Washing machines, cookers, cutlery etc.What if I complete a Self Assessment form?For the 2009-10 tax year, if your total income from UK property is under £68,000 a year before expenses, you can group the expenses as a single total on your tax return. If it’s £68,000 or more, you’ll need to show your expenses separately.Your Tax Office can ask to see your records at any time. So hold onto the detailed information even if your income’s less than £68,000.What if I don’t complete a Self Assessment form?If you’re employed and your taxable income from property is less than £2,500, your Pay As You Earn (PAYE) tax code can be adjusted to collect the tax on your property income. Your Tax Office will send you form P810 to report your income each year.However, you’ll still need to keep records, to enable you to fill in form P810. Your Tax Office can also ask to see your records to check your figures.If your income from rent is £2,500 or more you’ll need to complete a tax return.How long do I need to keep the records?You’ll need to keep your records for six years after the tax year to which they apply – whether you complete a tax return or not.The author provides no warranty that this information is correct and any action taken upon it is entirely at the risk of the reader Further advice can be found on the following website pages:
Rental property tax
Advice on Expenses and allowances
Hello my name is Johan. I write about holiday rental homes and travel destinations for a company that rent luxury holiday villas [vipvillas .com]. My work also appears in their luxury travel blog [VIPvillasblog .com], VIPvillasblog .com.I do freelance work also and I can be contacted to talk about working for you on travel related projects.Thanks for reading.