In this blog we are going to look at what constitutes a Serviced Accommodation and a Furnished Holiday Let, and the differences between the two including the tax implications. We will also consider the pros and cons of ownership and any differences that exist between ownership through a limited company structure compared to that of personal ownership.
What are they?
Furnished Holiday Lets (FHL)
A FHL is a type of short-term rental accommodation that can be a lucrative way for property owners to earn an income. They are classed as commercial and have more in common with running a hotel than running a rental business. They will be fully furnished, maybe with cable or satellite TV, broadband internet, towels and bed linen, and maybe a cleaning service at intervals during the stay. Lastly, FHL require specialist mortgages which are more in line with commercial interest rates. To qualify as FHL there are three occupancy conditions that need to be met:
The availability condition - The property must be available for commercial holiday letting for at least 210 days a year.
The pattern of occupation condition - Single lets SHOULD NOT exceed 31 days (therefore no long-term lets) and total lettings SHOULD exceed 155 days (22 weeks) a year.
The letting condition - The property MUST be commercially let for at least 105 days (15 weeks) a year.
Just be aware that if you plan to use the property yourself or let the property out to friends and family for either no cost or low cost, this isn’t counted as a commercial letting and would not contribute to the conditions above. While these requirements may seem strict, there is some flexibility if you are:
Unable to meet the required occupation figures - These figures can be averaged out across multiple FHL properties – however, properties in the Republic of Ireland are considered separate to the rest of the UK.
Unable to meet the actual occupation figure (after your ‘probationary’ period) - If during the previous year you met the occupation requirements, a period of grace can be granted (for a maximum of two consecutive years). This means you will retain your FHL status, providing you meet the occupation requirements going forward.
Serviced Accommodation (SA)
This is furnished accommodation that is available for short, medium and long term let. They have hotel-like amenities and are often advertised through online platforms like Airbnb. Again, they will be fully furnished, maybe with cable or satellite TV, broadband internet, towels and bed linen, etc. etc. SA also require specialist mortgages which are more in line with commercial interest rates. Some mortgages prohibit the use of Airbnb type platforms.
The Difference
On the face of it, very little! The main difference is that SA can be available for medium and longer term lets (more than 31 days) whereas FLH are short term lets (not more than 31 days). SA is often targeted at the corporate market and FHL at consumers looking for holiday accommodation.
So, with the differences being so small is it beneficial to operate your SA as a FHL? Let’s take a look at the taxation side of things.
How are they treated in terms of Taxation?
Taxation Aspect | Furnished Holiday Lets (FHL) | Serviced Accommodation (SA) |
|---|---|---|
General Tax Treatment | Treated as trading income | Treated as property income |
Losses and Reliefs | Carry forward losses, offset against future profits of the same trade. Separate claims would need to be made for UK losses and EEA losses | Losses carried forward, set off against future property business profits |
Capital Gains Tax (CGT) | Eligible for various CGT reliefs:
| Pay CGT on property disposals at 18% or 28%. |
VAT | Registration required if taxable turnover above £85k Follows VAT treatment for hotels and B&Bs Potential for Flat Rate Scheme at 10.5% Potential for Tour Operators Margin Scheme (TOMS) | Registration required if taxable turnover above £85k Follows VAT treatment for hotels and B&Bs Potential for Flat Rate Scheme at 10.5% Potential for Tour Operators Margin Scheme (TOMS) |
Capital Goods Scheme (CGS) | Available where build/conversion costs exceed £250k exc. VAT | Not available |
Distribute Profits with Spouse | Flexible profit distribution between legal owners | Profit distributed as per legal ownership |
Capital Allowances including Integral Fixtures | Claim for furnishings and equipment | Not available |
Class 4 National Insurance* | Not payable | Payable on relevant earnings. Currently (tax year 23-24) these are 9.73% for earnings between £11,908 and £50,270, 2.73% for earnings over £50,270. |
Pension Contributions | Classed as relevant earnings for pension contributions | Not eligible |
Inheritance Tax | Business Property Relief (BPR), inclusion in estate | Not eligible for Business Property Relief (BPR) |
Business Rates | Subject to business rates May be eligible for Small Business Rate Relief (SBRR) | Subject to business rates if available to let for 140 or more days May be eligible for Small Business Rate Relief (SBRR) Subject to Council Tax if available for let less than 140 days |
Allowable Expenses |
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*Not applicable when operating through a limited company structure.
Other considerations
Planning Permission
You may need to obtain planning permission to change a residential or buy-to-let property into serviced accommodation. It all depends on whether the local authority considers there has been a ‘material change’ in use, from residential (C3) to something more like a hotel or guest house (C1). There is currently no specific planning designation for serviced accommodation, which falls between a buy-to-let and a hotel – so it’s vital that you seek advice from your local authority before buying or converting a property.
The reason that some councils are taking a harder line is because serviced apartments – which can have an ever-changing roster of guests – can be unpopular with neighbours, particularly where there are shared communal areas like hallways, and can also impact the availability of longer-term rental properties.
Since December 2016, London landlords are only allowed to rent out serviced accommodation units for a maximum of 90 days. Airbnb deletes listings in the capital that are on the platform for over 90 days.
Corporate Lets
Many SA owners have reported a demand for “corporate lets” especially in larger cities. Here, landlords generate strong (and secure) rental premiums by letting SA units to employees on secondment or contractors. Some also let properties for weeks, and in some cases months, at a time – thereby reducing the level of churn.
Right to Rent Checks
You should consider how a person will be using your property to decide whether right to rent checks are necessary. If the letting is for a short, time-limited period, and the tenants intend to use the premises for leisure related purposes and will not remain in the property after this period, then you may conclude that the property is to be used as holiday accommodation. In this scenario there is no need to conduct right to rent checks. As a guide, the Home Office would consider that bookings of three months or more may indicate that a person is using the accommodation for a purpose other than leisure purposes and could be intending to use the accommodation as their only or main home. If the booking is open ended, or the initial booking was time-limited but is subsequently extended on one or more occasions such that the occupier appears to be using the premises as their only or main home, then it would be advisable to conduct right to rent checks.
Criminal activity
FHL, particularly in urban areas, have been used by criminal gangs as ‘pop up’ brothels. While prostitution itself is not illegal, sex trafficking and human slavery are potentially associated with this type of activity. In addition, use of stolen cards to pay for lettings is a real possibility, and you’ll need to put in place appropriate fraud protection to avoid being charged back by the card issuer.
Leasehold issues
Properties that are owned on a leasehold basis may have restrictions within the lease that prevent or restrict short term lets and serviced lettings. Investors should check before investing in property for short term let investments.
Limited Company V Personal Ownership
Where a SA does not meet the conditions of FHL then it may be beneficial to operate within a limited company structure in order to benefit from mortgage tax relief.
Where a number of SA’s are in operation this may form an even stronger case toward a limited company structure as a frequently reported downside is the additional compliance such as accountancy and other administrative costs of running a limited company.
Class 4 NI can be avoided if your SA is within a limited company structure that pays you through payroll as this income will not be treated as self employment.
Where an SA meets the conditions of FHL then there is little difference between the two in the shorter term. From an inheritance tax point of view it may be beneficial to opt for a limited company structure but this would need specialist advice on a case by case basis.
Final Word
Ultimately, the choice between SA and FHL depends on individual circumstances, property location, and personal preferences. Some landlords may find success by diversifying their portfolio with a mix of both rental types. In many cases SA’s are being used as corporate lets for stays of more than a month. This can offer high returns which might sway landlords to not meet FHL conditions, at least in the short to medium term.
Whichever option landlords choose, maintaining high standards of hospitality, customer service, and property upkeep will be crucial in attracting repeat guests and ensuring long-term profitability.
To discuss incorporating your SA or FHL into a limited company, converting your current Buy To Let (BTL) into a SA or FHL, or any other aspect of accountancy and taxation related to being a landlord then please get in touch.
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