Furnished Holiday Lettings

Furnished holiday lettings 

Furnished vacation lettings are a special case for tax purposes, with a number of benefits not available when it comes to normal residential lettings. One of these advantages is the way the interest and finance costs are treated.

Residential landlord – Restriction of relief

Landlords of residential properties can only draw relief from the finance and interest costs like mortgage interest. Regardless of at what rate the residential landlord is paying taxes, they’ll get a basic rate tax reduction. The costs circulating in between interest and finance are not deducting when calculation for taxable profit is initiated. Also, when the tax is worked out, the interest and finance costs are not considered. This results in 20% reduction in interest and finance costs in overall tax liability. This is capped at the lower of 20% of the amount or profit that is taxable which makes the liability to nil. In cases, when there is some interest and finance costs are left unrelieved, these are later considered when tax liability of the same property business is calculated in a later tax year and relief is provided by deducting the amount from the income tax.

Furthermore, this scenario has some disadvantages like the 20% capped relief is only given which means even if the property owner is a higher rate tax payer, he will still get the same relief.

Furnished holidays lettings – Deduction in full

Furnished holiday lettings won’t be able to experience the interest relief and when taxable profit is calculated, the interest and finance cost is deducted in full, this happens when a let qualifies as a furnished holiday let. There is no deduction cap which results in a loss that may affect or set against future profits from the same business. Moreover, as relief is done by deduction, the rate of relief is defined by using the landlord’s marginal rate of tax and is not capped at 20% where the landlord is an additional or a higher rate taxpayer.

Example

John is a landlord of a residential property. For the year of 2021/22, his taxable profit is around £30,000, without taking interest costs on the associated mortgage. £8,000 is paid as mortgage interest in the year.

John also runs another business and generates income from it which makes him pay tax at a high rate of 40%.

The tax on property income as per the above scenario is around £14,000 before applying basic rate tax reduction. Considering the mortgage interest, the basic rate tax reduction reduces £1700 (£8,000 @ 20%) to £10,400.

Another example is of Peter who has a furnished holiday let on which his profit is similar to John before deduction of interest costs which is £30,000. He is also liable to pay £8,00 mortgage interest similar to John. Also, he has another business or another source of income and thus he is a higher rate tax payer.

But, unlike John, he is able to lessen the mortgage interest, dipping the taxable profit to £22,000, where only £8,800 tax is payable (£22,000 @ 20%). Even both of the persons have similar interest and profit, one pays £1,600 lesser tax because he is able to obtain 40% marginal rate on his interest costs.

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Further information can be found here

HS253 Furnished holiday lettings (2020) – GOV.UK (www.gov.uk)