Comparing the tax differences between Furnished Holiday Lets and furnished residential lets

As a property investor, it is important to be aware of your tax obligations. If you have invested in a property for letting purposes and furnished it, you will need to pay tax on the income received from the property.

You may be eligible for various tax reliefs and deductions depending on the type of property you have.

There are tax reliefs and deductions available based on whether your property is a Furnished Holiday Let (FHL) or a more traditional long-term residential let.

What is the difference between a FHL and a furnished residential let?

A furnished residential let refers to a residential property that has been furnished prior to letting. These properties can be fully furnished or partially furnished.

Whereas, an FHL must meet specific requirements:

  • It must be located in the UK or in the European Economic Area (EEA)
  • Long-term lets (over 31 continuous days) must not exceed 155 days per year
  • It must be adequately furnished for normal occupation
  • It must be available for letting as an FHL for at least 210 days per year
  • It must be commercially let as an FHL for at least 105 days per year

Each option presents unique advantages and challenges, especially in terms of taxation.

What are the tax considerations for FHLs?

Starting from April 2025, the Furnished Holiday let allowance will be discontinued, significantly altering the favourable tax treatment currently available to FHL owners.

Currently, FHL owners can access substantial tax benefits, such as:

  • Capital Gains Tax: FHLs may qualify for Business Asset Disposal Relief instead of regular CGT, which is potentially taxed at a lower rate.
  • Capital allowances: Up to £1 million of capital expenditure can be claimed under the Annual Investment Allowance (AIA).
  • Financial costs: Costs such as mortgage interest are fully deductible from rental income, which helps to reduce taxable profits. This is not the case with non-FHL rentals.
  • Relevant earnings: FHL income is treated as earned income, making it eligible for relief at the owner’s highest Income Tax rate.

With the upcoming changes, FHL regulations are expected to align more closely with those for residential property lets, including similar allowances for those operating multiple properties as a business.

Tax considerations for furnished residential lets

As of 6 April 2020, Income Tax relief for finance costs related to residential property has been capped at the basic rate of Income Tax. These are also limited to the lower mortgage interest, rental income, or your adjusted total income.

Post-2016, the abolition of the ‘wear and tear allowance’, which allowed landlords to deduct a fixed percentage from their taxable earnings, has made the furnishing decision less crucial.

This allowance has been replaced by the ‘replacement of domestic items relief’, where landlords can claim the cost of replacing furnishings.

If you need tailored advice on property letting taxation, please get in touch with our team today.

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