Tax rules on holiday lets – an overview
When you buy a holiday let it’s easy to get caught up in the excitement and overlook that you have responsibilities to pay tax on rental income (both in the country in which the income is earned and the one in which you are domiciled). Whilst it can seem overwhelming, there is a wealth of information available and it is more straightforward than it appears.
Sadly, it isn’t the case that if you aren’t making a profit you don’t need to tell the taxman. If you own a holiday let, either in this country or overseas, then you need to declare income from this to HMRC, irrespective of whether you are making a profit. As well as being a legal obligation, it can even work in your interests to tell him as you will see below!
The following information applies to people who are UK resident or classed as resident for that tax year.
If you live and pay tax in the UK you must declare rental income from any property lettings to HMRC, irrespective of whether the property makes a profit.
If the property is outside the UK, then you must declare this on the foreign pages of your tax return. If you also pay foreign tax on the income, you can usually get credit for this against the UK tax you have to pay on it. See below for more information.
Furnished holiday lets
If you let a property out, that is either in the UK or European Economic Area for short periods, i.e. less than 31 days, and you achieve HMRC’s criteria, then it may be eligible for certain tax advantages as a Furnished Holiday Let (FHL). Whilst the eligibility criteria is set to change from 6 April 2012, the main criteria is currently that it is available to let for 140 days and actually rented out for 70 days at market rates, comprising short stays of less than 31 days. How a property qualifies for FHLs.
The main advantage is that losses from a furnished holiday let can be offset against other taxable income, e.g. from your business or employment. This only applies for the tax years 2009/10 and 1011 and has been withdrawn as a benefit from 6 April 2011.
If your property doesn’t qualify as an FHL
If your property doesn't qualify as a furnished holiday let, you will be taxed under the residential property lettings rules, whether the property is in the UK or overseas. Income tax is then payable on the net profits, having deducted allowable expenses from the income.
If, however, you own more than one property in the UK or more than one property overseas and they do not qualify as an FHL then they can be grouped together for tax purposes. Losses from one property can be offset against profits from another, with tax due on the overall profit.
Properties in the UK are treated separately from properties that are overseas and the two cannot be grouped together for tax purposes. So if your overseas property trades at a loss this cannot be deducted from the profits of a UK rental property.