Operating a holiday let in Wales comes with its share of tax obligations and regulations.
Understanding Wales holiday home tax rules and laws is crucial to running a profitable and compliant business.
This blog delves into the intricacies of business rates, taxes, capital allowances, and recent legislative changes affecting holiday lets in Wales.
Council Tax vs. Business Rates
One of the first considerations for holiday let owners is determining whether the property falls under council tax or business rates. This distinction depends on how frequently the property is rented out.
Council Tax
- If your holiday let is available to rent for fewer than 140 days a year, it will be classified as a residential property and will be subject to council tax.
- In recent years, Welsh local authorities have been granted powers to charge a council tax premium on second homes and empty properties. This can range from 50% to 300%, depending on the local authority’s policies. The rationale behind this is to curb the negative impact that holiday homes and second homes may have on local housing markets, particularly in tourist hotspots where local people struggle to buy homes due to inflated property prices.
Business Rates
- If your holiday let is available to rent for 140 days or more per year and actually rented out for at least 70 days, it is classified as a self-catering property. This reclassification means the property will be liable for business rates rather than council tax.
- Small Business Rate Relief: Many holiday let owners in Wales can benefit from Small Business Rate Relief, which applies to properties with a rateable value below a certain threshold. Properties with a rateable value of up to £6,000 may qualify for 100% relief, meaning no business rates are payable. Those with a rateable value between £6,001 and £12,000 may receive tapered relief.
Recent Changes: Stricter Letting Thresholds (April 2023)
In April 2023, the Welsh Government introduced new rules regarding how many days a holiday let must be available and actually let in order to qualify for business rates. The changes were made to tighten the distinction between genuine holiday lets and second homes, with the goal of ensuring that owners who claim business rates are indeed contributing to the tourism economy.
The new thresholds are:
- The property must be available for letting for 252 days a year (up from 140 days).
- It must be let for at least 182 days (up from 70 days).
These changes aim to ensure that only properties being genuinely used as holiday lets benefit from business rate relief. Owners who fail to meet these thresholds will see their property reclassified and subjected to council tax, which could also include hefty premiums depending on the local authority.
Furnished Holiday Let (FHL) Status
One of the key tax advantages for holiday let owners is achieving Furnished Holiday Let (FHL) status, which offers several tax benefits. However, the property must meet strict criteria set by HMRC to qualify for FHL status.
Criteria for FHL Status
- The property must be furnished and available for letting for at least 210 days in the tax year.
- It must be actually let for at least 105 days, excluding periods of long-term occupation (more than 31 consecutive days).
- The property cannot be let to the same person for more than 31 days in a single occupancy for more than 155 days in the year.
Tax Benefits of FHL Status
- Capital Gains Tax Reliefs: FHL properties are treated as businesses, meaning owners can benefit from various capital gains tax reliefs, such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and Rollover Relief. This can significantly reduce the amount of capital gains tax payable if you sell your holiday let.
- Capital Allowances: FHL owners can claim capital allowances on the cost of furniture, fittings, and equipment used in the property, including beds, sofas, kitchen appliances, and even certain types of building alterations such as energy-efficient improvements. These capital allowances can be deducted from your rental income, reducing the taxable profit.
- Pension Contributions: Rental income from FHLs counts as earnings for pension purposes, allowing you to make tax-deductible pension contributions from the income generated.
Income Tax on Holiday Let Income
Holiday let owners in Wales are required to pay income tax on the profits generated from their properties. If your holiday let qualifies for FHL status, your income will be treated differently than that from a standard buy-to-let investment.
FHL Tax Treatment
- Profits Calculation: The profits from an FHL are calculated in much the same way as other rental properties, with allowable expenses deducted from the gross rental income. Allowable expenses include maintenance costs, utility bills, cleaning, insurance, and mortgage interest (if applicable).
- Mortgage Interest Relief: Unlike standard residential lettings, where mortgage interest relief has been limited in recent years, FHL owners can still deduct mortgage interest as a legitimate business expense. This allows owners to offset interest payments against rental income, reducing the overall tax liability.
- Profit Allocation: If your FHL is jointly owned (e.g., between spouses), you can allocate profits between owners in a more flexible way than for other types of rental property, which must follow the ownership share. For example, one owner might be allocated more profit if they are in a lower tax band, thus reducing the overall tax burden.
Capital Gains Tax (CGT) on the Sale of Holiday Lets
If you decide to sell your holiday let, you will be liable to pay Capital Gains Tax (CGT) on any profit made from the sale. However, if the property has FHL status, you could benefit from several CGT reliefs.
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
- FHL properties can qualify for Business Asset Disposal Relief, which reduces the rate of CGT to 10% (as opposed to the standard rates of 18% or 28%) on gains up to £1 million. This is a significant tax-saving opportunity for holiday let owners.
Rollover Relief
- If you sell your FHL and reinvest the proceeds in another qualifying business asset, you may be able to defer paying CGT through Rollover Relief. This means you only pay CGT when you eventually sell the replacement asset, spreading the tax burden over time.
Capital Allowances
A significant tax benefit for holiday let owners in Wales is the ability to claim capital allowances. These allowances enable you to deduct the cost of certain assets used in the property from your taxable income, thereby reducing your overall tax liability.
What Can You Claim?
- Furniture and Furnishings: Items such as beds, wardrobes, tables, chairs, and sofas are eligible for capital allowances.
- Fixtures and Fittings: Appliances like refrigerators, washing machines, and ovens are also claimable.
- Integral Features: Certain improvements to the building, such as heating systems, electrical wiring, and plumbing, can be included in capital allowances claims.
- Energy-Efficient Enhancements: Investments in energy-efficient appliances or insulation upgrades may qualify for additional tax relief under certain green schemes.
Annual Investment Allowance (AIA)
Holiday let owners can claim capital allowances through the Annual Investment Allowance (AIA), which provides a 100% deduction on qualifying expenditure in the year it is incurred. The AIA limit can change from year to year, but for most small holiday let businesses, it provides ample room to claim capital allowances on property improvements and furnishings in a single tax year.
Inheritance Tax (IHT)
Holiday lets may also qualify for Business Property Relief (BPR), which can reduce the value of your holiday let for inheritance tax purposes by up to 100%. This relief is only available if your property is considered to be a genuine business asset, so active management and significant involvement in the letting process are required. Owners who delegate all management responsibilities to a third-party agency may not qualify for this relief.
Owning and operating a holiday let in Wales can be both rewarding and profitable, but it is essential to navigate the complex world of business rates, taxes, and capital allowances. The recent changes to holiday let rules in Wales, including the higher letting thresholds, have added additional considerations for property owners. However, by understanding the distinction between business rates and council tax, taking advantage of FHL status, and utilizing tax reliefs such as capital allowances and CGT exemptions, holiday let owners can optimize their tax position and ensure long-term profitability.
As always, it is highly recommended to consult a tax adviser or accountant to ensure you are taking full advantage of the available tax reliefs and complying with all regulations.
Please Note: The information contained in this article was accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time, so please contact our prospective new owner team if you’d like to hear how. Nothing in this article constitutes the giving of financial, tax or legal advice to you; please consult your own professional advisor (accountant, lawyer etc). in this regard. If we have referred within the article to a third-party provider of unregulated holiday let mortgages, this is due to the fact that such mortgages aren’t currently regulated by the FCA.
As a helpful reminder, your home may be repossessed if you do not keep up repayments on a mortgage, so again anything you decide to do in this particular area this is one on which you should take your own professional advice on too, as we aren’t providing and can’t provide you with this.
As a holiday letting owner you are responsible for compliance with health & safety laws, regulations and guidance, and for having suitable insurances in place (not Sykes Holiday Cottages or its brands). From time to time, Sykes shares information with you on the topic of health and safety and insurance. When it does so, it is not providing you with advice (legal, financial, tax or otherwise); please seek your own as you see fit. In addition, it is not making any representations or warranties about the information being complete or free from errors or inaccuracies. Sykes shall not be liable for any loss or damage arising under or in connection with your reliance on it.
