Exam prep: Buy-to-let

20 October 2021

Brand Financial Training looks at the move of buy-to-let property owners into the furnished holiday let market and what paraplanners need to know

Anyone who has ever had a buy-to-let property will know that several changes to the taxation of them have led to many landlords exiting the market; this has included increases in stamp duty land tax and capital gains tax rates, as well as a reduction in how much mortgage interest can be offset against rental income.

Other landlords have simply decided to stop long-term letting and instead turn their property into a holiday let and by doing so benefit from several tax advantages. The availability of these however does depend on the accommodation meeting various conditions; these are that the property must be:

  • in the UK or in the EEA (which includes Iceland, Liechtenstein and Norway)
  • furnished – sufficient for normal occupation
  • commercially let – there must be an intention to make a profit
  • available for let for at least 210 days in a year – i.e. 30 weeks
  • commercially let to the public for at least 105 days in a year i.e. 15 weeks (this does not include any lettings to friends and family at reduced rates – this is not commercial!).

In addition, if the total of all lets that exceed 31 days is more than 155 days during the year, then it won’t qualify as a furnished holiday let in that year.

You should note that for a new let, the tests should be applied to the first 12 months from when the letting started and for a continuing let, the tests should be applied to the tax year.

The various lockdowns during 2020 and 2021 may have meant that some owners will not have met the various rules around occupancy during that year. For those owners in this position it is possible to make a ‘period of grace election’. What this means is that if a property qualifies in one year but does not meet the conditions in the following year, an election can be made to treat the property as a furnished holiday let in the second year as long as there was a genuine intention to meet the conditions, so advertising was done as normal or where the bookings were cancelled due to unforeseen circumstances.

So assuming the criteria is met, what are the tax advantages of a property being treated as a furnished holiday let rather than a residential property let?

  • The costs of furnishing can be deducted from profits as capital allowances
  • Mortgage interest can be deducted in full
  • Rental income is treated as ‘relevant earnings’ so can be used to make pension contributions
  • On disposal it is possible to claim business asset disposal relief, roll-over relief or hold-over relief

However, there are some disadvantages to think about too:

  • Losses cannot be offset against other income
  • If turnover exceeds £85,000 the owner will need to become VAT registered

There is also more work involved with a holiday let, not least ensuring the criteria is met for it to qualify as a furnished holiday let. Records will also need to be kept separate for UK businesses and for overseas businesses; the losses from one business cannot be used against the profits of another (although if the UK business makes a loss it can be set against future profits of the UK business and similarly for the overseas property).

With more and more properties being used as furnished holiday lets, HM Revenue & Customs have indicated that they will ask for proof that the property does actually qualify. It’s important therefore that owners keep accurate records of all the bookings as well as the income being received should proof be requested.


Professional Paraplanner