*Disclaimer* This is not financial advice and before making any decisions we advice you speak to a specialist property tax accountant
If you own the property in your own name, then you may be incentivised to look at how a Furnished Holiday Let (FHL) can be far more tax efficient than a standard buy to let property.
This is because with an FHL, you can deduct all the trading expenses from your revenue before the income is taxable. This refers to anything like Mortgage Interest, Advertising Expenses and Maintenance Expenses. Which means you only pay tax on the profit rather than the revenue. For normal buy to lets, this is no longer the case. For landlords who have property in their own personal name, the whole revenue is taxed as income tax so that you put tax on the rent and not the profit.
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For example:
You receive £900 revenue each month and your mortgage is £400. (For this example we are using the same numbers however the FHL revenue tends to be
higher revenue and higher interest rates)
IF BUY TO LET:
Rent - £900 Mortgage - £400
Tax @ 20%: £900 x 20% = £180.
Total Profit: £900 - £400 - £180 = £320 net profit
Tax @ 40%: £360
(More Likely due to earnings)
Total Profit: £900 - £400 - £360 = £140 net profit
On the other hand, for a Furnished Holiday Let your numbers look like this"
IF FURNISHED HOLIDAT LET (FHL):
Rent - £900 Mortgage - £400
Taxable amount: £500 (£900-£400)
Tax @ 20%: £500 x 20% = £100
Total Profit: £900 - £400 - £100 = £400 net profit
Tax @ 40%: £500 x 40% = £200
(More Likely due to earnings)
Total Profit: £900 - £400 - £200 = £300 net profit
COMPARATIVE:
Annual Profit H2H:
BTL @ 20% Tax Rate: £320 x 12 (months) = £3,840
FHL @ 20% Tax Rate: £400 x 12 (months) = £4800
EXTRA £1000 EACH YEAR NET PROFIT, THAT’S 25% MORE PROFIT.
HOWEVER, BELOW IS THE MOST COMMON SCENARIO DUE TO EARNINGS:
BTL @ 40% Tax Rate: £140 x 12 (months) = £1,680.
FHL @ 40% Tax Rate: £300 x 12 (months) = £3,600.
EXTRA £2000 INCOME EACH YEAR, THAT’S 114% MORE PROFIT.
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It is important to note that in order to qualify for this relief, there are three main conditions relating to the availability and occupancy of a holiday let that must be met in order to qualify for the tax advantages. These are as follows:
The property must be available for commercial holiday letting to guests and holiday makers for at least 210 days (30 weeks) per year and be actively promoted as such;
If the furnished holiday let is rented out to the same person for more than 31 days, there shouldn’t be more than 155 days ( 22 weeks) of this type of ‘long term’ occupation per year;
The property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made it available. The time either you or your family use the property is not included in this total.
Although these conditions seem hard to meet, in reality if you are running your business correctly then there should be no problems.
Would you like to know more? Give the team a call on 0113 292 6904 or email us at info@ppsltd.net
