We often get asked about the tax treatment of interest on Furnished Holiday Lettings (FHL). As specialist furnished holiday lettings accountants, here we focus on the tax treatment of mortgage interest payments. Furnished holiday lettings are something of a special case. A FHL benefits from a number of advantages not available to standard residential lets. One of these advantages is in relation to the treatment of interest and finance costs.
Residential landlord – Restriction of relief
Residential landlords can now only obtain relief for interest and finance costs, such as mortgage interest, as a basic rate tax reduction. This is regardless of the rate at which the residential landlord pays tax. Tax is initially worked out on the profit without taking account of the interest and finance costs. The resulting tax liability is then reduced by 20% of the interest and finance costs. This is capped at the lower of 20% of the taxable profit or the amount that reduces the tax liability to nil. Any unrelieved interest and finance costs can be carried forward for relief as an income tax deduction in calculating the tax liability of the same property business in a later tax year. The carried forward costs being relieved at the first available opportunity.
This approach has a number of downsides – relief is only given at 20% even if the landlord is a higher or additional rate taxpayer and relief may not be given in full in the tax year in which the costs are incurred.
Furnished holidays lettings – Deduction in full
The changes to interest rate relief do not apply to furnished holiday lettings. Where a let qualifies as furnished holiday let, interest and finance costs can be deducted in full when working out the taxable profit. The deduction is not capped. This can give rise to a loss which may be carried forward and set against future profits from the same furnished holiday business. Also, as relief is by deduction, relief is given at the landlord’s marginal rate of tax not at 20% where the landlord is a higher or additional rate taxpayer.
Toby is a residential landlord. For 2021/22 his taxable profit before taking account of interest costs on the associated mortgage is £30,000. Mortgage interest paid in the year is £8,000. Toby has other income from his photography business and pays tax at the higher rate of 40%. Before applying the basic rate tax reduction, the tax on the property income is £12,000 (£30,000 @ 40%). The basic rate tax reduction in respect of the mortgage interest reduces this by £1,600 (£8,000 @ 20%) to £10,400.
Tom has a furnished holiday let on which profit before deduction of interest costs is also £30,000. He too pays mortgage interest of £8,000 and, like Toby, has other income and is a higher rate taxpayer. However, unlike Toby, he can deduct the full amount of the mortgage interest, reducing the taxable profit to £22,000, on which tax of £8,800 (£22,000 @ 40%) is payable.
Despite identical profit and interest, Tom pays £1,600 less in tax than Toby as he is able to obtain relief for his interest costs at his marginal rate of 40%.
If you are running a furnished holiday let we often find that what you can and cannot claim has not been fully assessed. As a result, you could be missing out on £’000’s. Get in touch on 0800 907 8633, via firstname.lastname@example.org or via our online contact form and we will offer you a complimentary consultation to discuss your current position and assess whether your tax structure meets your investment plans now and into the future.