Tax status of accommodation businesses

Disclaimer:  Whilst every effort has been made to ensure the accuracy of the information contained in the Pink Book of Legislation, we regret that we cannot be responsible for any errors. This guide is not intended to be a definitive statement of the law in England. If you require precise or detailed information on the legislation mentioned in this guide, or on the legal implications for you in particular, you should consult a professional legal adviser.

Key facts

  • In terms of taxation, there is a fundamental difference between the way HM Revenue & Customs (HMRC) treats holiday accommodation and standard rental properties.
  • Having your property treated as a trade business, rather than a rental property, carries a number of advantages.
  • To comply with the Furnished Holiday Letting (FHL) Rules a property must be available for at least 210 days a year, let for at least 105 days and operated in a commercial manner. 

 

 

Rental and trade businesses

In terms of taxation, there is a fundamental difference between the way HM Revenue & Customs (HMRC) treats holiday accommodation and standard rental properties.

  • Rental properties are deemed to be rental businesses.
  • Hotels, guesthouses and B&Bs are treated as trade businesses.
  • Self-catering accommodation can be treated as a trade business provided that the conditions of the ‘Furnished Holiday Letting Rules’ are met.

 

Having your property treated as a trade business carries the following advantages:

  • It ensures that income, net of allowable expenses, is treated as earned income. This means that losses can be offset against other income (Note: this does not apply to self-catering properties) and capital allowances can be claimed in respect of all furniture and equipment used in the business. This compares favourably with the treatment of rental properties, where losses can only be offset against future income and you cannot claim capital allowances in respect to any new furniture and equipment.
  • Trade businesses are treated as a business asset for the purposes of determining Capital Gains Tax, which gives you far greater allowances than you get for rental properties.
  • For Inheritance Tax purposes, the property is deemed to be a business asset and can be passed on tax free.

 

  • Note: HMRC was recently successful in challenging the inheritance tax exemption of a self-catering property by arguing the level of service provided to guests was not sufficient for it to be deemed a trading business for the purposes of Inheritance Tax. You should therefore seek professional advice as to whether your property is exempt from Inheritance Tax.

 

Furnished Holiday Letting Rules (FHL)

In order for your self-catering property to qualify as a trade business the following conditions need to be met:

  • Commercial operation: The business must be carried on commercially, with a view to making a profit.
  • Pattern of occupation: Total periods of longer term occupation must not exceed 155 days (approx. five months) during the relevant period. A period of longer term occupation is a letting to the same person for longer than 31 continuous days.
  • Availability: The property must be available for commercial letting as holiday accommodation to the public for at least 210 days (approx. seven months) during the relevant period.
  • Letting: The property must be commercially let as holiday accommodation to members of the public for at least 105 days during the relevant period. A letting for a period of longer term occupation is not a letting as holiday accommodation for the purposes of this condition.

 

The reason for these conditions is to prevent people from trying to gain trade business status, and the associated benefits, for either their home or their holiday home when they have no intention of operating them as a commercially viable Bed and Breakfast (B&B) or self-catering operation.

  • Note: it is important to note that if you operate a self-catering property, you are unable to claim sideways loss relief against other income. Also, regardless of complying with the FHL Rules, HMRC may deem your self-catering property to be subject to Capital Gains Tax and Inheritance Tax if it is determined that you do not provide a sufficient level of services to demonstrate that it is trading businesses. It is therefore important to gain advice from an accountant who understands the taxation rules for self-catering businesses.

Further guidance

  • The tax rules relating to holiday accommodation are complex, so it is best to seek advice from a professional tax consultant on the most efficient way to set up and operate your business.