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Many Airbnb lets are used as holiday accommodation. From a tax perspective, furnished holiday lettings enjoy some tax advantages over other lets. So, is it possible for an Airbnb let to benefit from these advantages and what conditions must be met?
Simply letting a property as furnished holiday accommodation is not in itself sufficient to qualify for the furnished holiday letting (FHL) treatment. As with other lets, Airbnb lets must meet the conditions set out in the legislation.
The first point to note is that the FHL treatment is only available to properties which are in the UK or the EEA and which are let furnished. Occupancy conditions There are three occupancy conditions which must be met for a property to be treated as FHL.
Condition 1 – the pattern of occupancy condition The pattern of occupancy condition is met if the total of all lettings in the tax year exceeding 31 days is 155 days or less. The nature of holiday letting is multiple short lets rather than longer lets and this condition seeks to recognise this.
Condition 2 – the availability condition To meet this condition the accommodation must be available for letting for at least 210 days in the tax year. Days where the owner stays in the property do not count as days when the property is available for letting.
Condition 3 – the letting condition The letting condition is met if the property is let commercially as furnished accommodation to the public for at least 105 days in the tax year. Only commercial lets count towards this total – any days when the property is let to family or friends at a reduced rate or where they are allowed to use the property for free are ignored.
Longer term lets of more than 31 days are also ignored (unless a let which was supposed to be less than 31 days is extended due to unforeseen circumstances, such as a delayed flight or the holidaymaker becoming ill).
If a person has more than one property let as holiday accommodation (whether via Airbnb or similar or otherwise), an averaging election can be made where the letting condition of 105 days is not met. As long as the average let across all properties is at least 105 days in the tax year, the condition is treated as met. Thus, if a person has three holiday properties which were let commercially for periods of 31 days or less for at least 315 (3 x 105) days in the year, the average let would pass the test.
Period of grace election
A second election, a period of grace election, can be made if the landlord genuinely intended to meet the letting condition but was unable to do so, as long as the condition was met in the previous tax year. This will allow the property to continue to be treated as a FHL. If the condition is not met the following year, a second period of grace election can be made. However, if the condition is not met in the fourth year after two consecutive period of grace elections, the property will no longer qualify as a FHL.
Advantages Qualifying as a FHL offers a number of advantages. It opens the door to various capital gains tax reliefs for traders, including entrepreneurs’ relief. The landlord is also eligible to claim plant and machinery capital allowances if the cash basis is not used. Profits also count as earnings for pension purposes.
The self-assessment deadline is looming. Self-assessment tax returns for the year to 5 April 2019 must be filed online by 31 January 2020 if a late filing penalty is to be avoided.
Landlords will need to complete the property income pages. Particular care should be taken where the landlord has a loan or a mortgage as the way in which relief is given for financing costs is changing and the position for 2018/19 is different to that for 2017/18.
The way in which relief for finance costs is given is moving from relief by deducting the finance costs when computing profits to giving relief in the form of a basic rate tax reduction. The 2018/19 tax year is a transitional year.
What costs are eligible for relief?
Interest payable on loans to buy land or property which is used in the rental business is eligible for relief, as is interest on loans to fund improvements or repairs. It should be noted that it is not necessary for the loan to be secured on the let property – the rule is that interest is allowable on borrowings up to the value of the property when first let. Thus, if a landlord borrowed against their main home to fund a buy-to-let investment property, the interest on that loan would be allowable on the loan up to the value when the property was first let. If the mortgage on the residential property is more, the allowable interest is proportionately reduced.
Relief is also available for the costs of getting a loan.
It should be noted that it is only the interest and other finance costs which qualifies for relief – no relief is available for any capital repayments which may be made.
The position for 2018/19
For 2018/19, relief for 50% of eligible finance costs is given as a deduction in computing the profits of the property rental business and relief for the remaining 50% is given as a basic rate tax reduction. This makes completing the property pages of the tax return slightly tricky as the information must go in two places.
The first box which needs to be completed is Box 26. This is where allowable loan interest and other financial costs need to be entered. Amounts entered in this box are deducted in computing rental profits. Therefore, as only 50% of the allowable finance costs for 2018/19 are relieved in this way, only 50% of the costs for that year should be entered in this box.
The remaining 50% is entered in Box 44, helpfully titled ‘Residential finance costs not included in box 26’. The amount entered in this box is used to calculate a reduction in the landlord’s tax bill. The reduction is equal to 20% (the basic rate of income tax) of the amount entered in Box 44.
If you have any unrelieved finance costs from earlier years, these should be entered in Box 45. Any balance of residential finance costs which is unrelieved may be carried forward to future years for relief by the same property business.
In the event that a loss arises in a trade or profession, consideration should be given as how best to obtain relief for that loss. As with many things, there is no ‘one size fits all’ and the best option will depend on the trader’s particular circumstances.
Option 1 – Relief against general income If the trader has other income, one of the easiest (and quickest) ways to obtain relief for the loss is to set against general income.
However, this option is only available where accounts are prepared using the traditional accruals basis; traders using the cash basis cannot relieve a trading loss in this way.
A claim can be made to relieve the loss against:
• Income of the same tax year;
• Income of the previous tax year;
• Income of both the current and the previous tax years.
If the trader wishes to relieve the loss against the income of the current and the previous tax year, they must choose which year has priority. The income of the priority year must be completely extinguished before the balance of the loss can be set against the other year; it is not possible to make a partial the claim and tailor the relief, for example, to preserve personal allowances. If the individual does not have sufficient income in the current or previous tax year, but has a capital gain, the relief can be set extended to capital gains (net of capital losses but before the annual exempt amount). When choosing whether to relieve the loss in this way, consideration should be given to preserving personal allowances. If other income in the year is sheltered by personal allowances, there is little benefit in making a claim against general income.
Option 2 – Against later profits of the same trade A loss arising in a trade or profession can be carried forward and set against future profits of the same trade. However, the loss must be set against the first tax year in which a profit arises – again it is not possible to tailor claims to preserve personal allowances. If the loss is not fully utilised against the first year in which a profit arises, the unused balance must be set against the next tax year in which a profit arises.
Option 3 – Relieving an early year loss If the trade is relatively new, the trader may be able to benefit from a special relief that applies to losses made in the early years of the trade. Under this relief, a loss that is made in the year that the trader starts to trade or any of the three subsequent years (i.e. the first four years of the trade) can be carried back and set against total income of the three years before the tax year in which the loss was made, with earlier years taken in priority to later years. This option is not available where accounts are prepared using the cash basis.
Option 4 – Terminal loss relief In the event that a loss is made in the final 12 months of trading, relief can be claimed under the terminal loss relief provisions against the profits from the same trade taxed in the four years to cessation. Which option? The best option will depend on the trader’s personal circumstances. Consideration should, however, be given to preserving personal allowances, obtaining relief at the highest possible rate and obtaining relief as early as possible.