Tax Status of Accommodation Businesses
- In terms of taxation, there is a fundamental difference between the way HM Revenues and 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.
Rental and trade businesses:
In terms of taxation, there is a fundamental difference between the way HM Revenues and Customs (HMRC) treats holiday accommodation and standard rental properties.
- Rental properties are deemed to be rental businesses
- Hotels, Bed and Breakfasts (B&Bs) and holiday lets accommodation are treated as trade businesses .
- 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 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. Therefore, you pay less tax when you come to sell either the property or the business.
- For inheritance tax purposes, the property is deemed to be a business asset and can be passed on tax free.
Qualifying as a trade business
- In order for your property to qualify as a trade business there are certain conditions that need to be complied with, as follows. 1.The accommodation must be available for commercial letting to the public for at least 140 days per year and be actually let for at least half that period.
- The accommodation must be let on a commercial basis whereby it is capable of providing a profit. This means that the potential income from letting the accommodation will cover all the outgoings of the accommodation including the mortgage, utilities and council tax.
- The accommodation must be furnished.
The reason for these conditions is to avoid people 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.
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.
For further information please visit the HMRC website – www.hmrc.gov.uk