Return on Investment on Furnished Holiday Lets

A Furnished Holiday Let (FHL) is a commercially let property (so your intention is to make a profit) which is furnished – this means, according to HMRC’s definition, there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.

FHL have 3 annual occupancy tests to pass

1. The pattern if occupation condition - if the total of all lettings that exceed 31 continuous days is more than 155 days during the year then the property is not a FHL.

2. The availability condition - the property must be available for letting for at least 210 days inthe year

3. The letting condition - the property must be let to the public for at least 105 days in the year (so this does not include days when friends or family are occupying the property at a reduced rate or where there is no charge).

The level of financial return on any property will vary considerably depending on your circumstances. If you have a cottage which was previously let to a farm worker or tenant then you may only have to pay for some repairs and furnish the property which is considerably less investment required then building from scratch, purchasing new or renovating an old barn.

During peak seasons a holiday let could yield up to 30% more than a buy-to-let property but due to most FHL being let on average for 20-24 weeks in a year this balances out to deliver an 8% annual return compared with 6% for a buy-to-let property.

A FHL much like an assured shorthold tenancy (AST) is subject to income tax at 20%, 40% or 45% depending on levels of other income. Certain expenses will be deductible such as repairs, letting fees, business rates and electricity. Unlike an AST property improvement maybe deductible as capital
allowances.

VAT treatment is another area where a FHL differs considerably from an AST. Rental income from a FHL is a standard-rated supply for VAT with AST income being an exempt supply. Effectively, if the property is let within the VAT registered farming business, then any input VAT on any expenses or purchases relating to the FHL can be reclaimed. The downside is that Output VAT will be chargeable on the rental income, this is currently reduced to 12.5% but set to return to 20% from 1st April 2022.

If the FHL business is run separately to the farming business and assuming the new FHL business is not VAT registered and does not reach the annual VAT turnover threshold of £85,000 then output VAT would not need to be charged to your customers. The downside is you won’t be able to reclaim any of the input VAT on repairs/ other expenses. If the FHL remains a farming business asset and the farm is still predominantly a trading business, and the property is an asset of the business then the property could qualify for Business Property Relief under the current rules and would not be subject to Inheritance Tax. If it’s stripped out from the trading business or leads to the farming business, no longer being predominantly a trading business then this could lead to IHT being chargeable upon death.