The tax implications of owning holiday accommodation
26 Jul 2022
Over recent years, glamping has become an increasingly popular form of farm and estate diversification. As a variety of different accommodation types and levels of service can be provided, it is necessary for the tax treatment to be assessed on a case-by case basis. In this article, we consider some of the key tax considerations of owning such property.
Property business or trade?
A glamping operation where the focus is on the services provided, could qualify as a trading business. Where the accommodation is not accompanied by additional services, the business will qualify as a rental business. Provided certain conditions are met, a holiday accommodation business could qualify as a Furnished Holiday Let (FHL).
Furnished Holiday Let
To qualify as a FHL, HM Revenue & Customs (HMRC) states that there must be sufficient furniture provided for normal occupation, with visitors entitled to use that furniture, and the property must be commercially let. The accommodation must also meet the following letting conditions:
- Be available for letting for at least 210 days in the tax year (or first 12 months for a new trade).
- Actually be let for at least 105 days in the tax year.
- Not be let on longer term lettings for more than a total of 155 days during the year, with long-term lettings being those of more than 31 days.
Where these FHL criteria are met, the business will be a trading business and taxed as such. This results in a more advantageous tax treatment to that of a normal property letting business. The advantages are as follows:
- Finance costs – there is no restriction on the deductibility of finance costs incurred in relation to the financing of a FHL business, such as mortgage interest costs. Tax relief for finance costs is restricted to basic rate relief for non-FHL residential property.
- Pensionable income – profits from FHL businesses are taken into consideration when determining the level of pension contributions that an individual can make (regular letting income is not regarded as income for pension purposes).
- Capital gains tax (CGT) reliefs – FHLs qualify for rollover relief, gift relief and Business Asset Disposal Relief (BADR) (regular letting businesses do not qualify for these reliefs).
- Capital allowances – the cost of furniture, furnishings and fixtures and fittings in the property are eligible for capital allowances (there are no capital allowances available for regular residential property lettings).
- Profit share – FHL income is not automatically split 50:50 between spouses, and instead can be allocated to each individual with reference to the actual work undertaken (regular letting income from jointly-owned property is split 50:50 between spouses unless there is a declaration of trust and paperwork submitted to HMRC to state otherwise).
- Losses – any losses incurred are offset against other FHL profits in the same year or carried forward to be offset against future FHL profits.
The definition of a caravan for capital allowances purposes is “any structure designed or adapted for human habitation that is capable of being moved from one place to another”.
A caravan may qualify as a plant investment, and for capital allowances if it does not occupy a fixed site and is regularly moved as a part of normal trade usage, even if it is only moved from its summer site to winter storage. Structures that are not moveable, for example, glamping pods that will be permanently sited, would not qualify. Where the asset meets these conditions, the Annual Investment Allowance (AIA), which currently provides 100% relief for tax in the year of acquisition on the first £1 million of qualifying expenditure, will also be available.
Capital allowances can be claimed on plant and machinery assets used in FHL businesses, meaning the cost of outfitting the accommodation can be deducted from the profits of the business for tax purposes. These can include:
- Data and power installations.
- White goods.
- Fitted carpets.
Capital allowances can only be claimed by the individual that has both incurred the costs and is also carrying out the qualifying activity.
It should also be noted that the 2021 Spring Budget announced a ‘super deduction’ tax relief, offering the ability to offset 130% of the cost of qualifying investment in plant and equipment in the year of purchase for the two years from 1 April 2021; but this relief applies only to limited companies. Creating a limited company may therefore be an issue for consideration, given the added advantage of the protection of limited liability, combined with this potentially one-off enhanced tax relief.
Capital gains tax
As previously mentioned, as a FHL qualifies as a business asset for CGT purposes, the following reliefs are available:
Capital gains made on business assets can be rolled over into a FHL business. The rolled over gains do not become chargeable until the replacement asset is sold, although if the conditions are met, the gains can be rolled over again into further qualifying replacement assets. The new asset must be acquired either within 12 months before the capital gain arises, or within 36 months after. Where the new asset is a depreciating asset, with a useful economic life of less than 60 years, the rolled over gain is deferred until the earliest of: 10 years, disposal of the new asset or when the asset ceases to be used within the trade.
This is available to defer capital gains on disposals where business assets are gifted. A FHL would qualify as a business asset for this purpose. In practice, this means that the CGT base cost of the asset is transferred by the donor to the new owner.
Business Asset Disposal Relief
This was formerly known as Entrepreneurs’ Relief. For a qualifying disposal, the CGT is reduced to 10% instead of the usual rates of 18%/28% for residential property. However, there are various conditions that must be met, and there is a lifetime limit for qualifying gains of £1 million. You can find out more about Business Asset Disposal Relief (BADR) in our factsheet here.
A trading business may qualify for business property relief (BPR) from inheritance tax (IHT). A rental business where the activities consist wholly or mainly of letting will not qualify for BPR. A hotel or bed and breakfast accommodation offering a level of services to the guests could be eligible for BPR. Where a high level of services is provided, a FHL business may also qualify for relief.
In recent years there have been several tax tribunal cases relating to FHLs. With regards to the level of services, the bar is set very high and the position would need to be substantiated to HMRC, as it is highly likely to be challenged.
A wholly or mainly test is applied to establish the business is, on balance, trading or investment.
Where an individual is liable to income tax on profits from a trade, they will generally also be liable to self-employed Class 2 and Class 4 National Insurance contributions (NICs). FHL profits are not subject to National Insurance. Class 2 NICs are currently £3.15 per week and Class 4 NICs are 10.25% on profits between £9,880 and £50,270, and 3.25% thereafter.
Where a business exceeds the VAT registration threshold, currently £85,000, in any 12-month period, it will be required register for VAT.
Whereas regular residential accommodation is exempt from VAT, the provision of holiday accommodation is subject to the standard 20% rate of VAT.
In summary, the tax implications and considerations of all types of holiday accommodation businesses can be very complex and are very much dependent on the individual circumstances. Professional advice should be sought to ensure both compliance with the regulations, and also that any tax efficiencies are maximised.
For any further queries on any of the issues raised here, please contact Collette Parry.