How rental income is taxed?

Do you rent out a property? Do you know there are different tax rules depending on the type of rental property you have?

Understand the key differences between Furnished Holiday Lets (FHLs) and residential lets

Furnished Holiday Lets (FHLs) are one classification of rental properties and the other main one is residential lets which are the more standard longer-term lets. Generally, all rental income from residential property is taxable but there are tax reliefs available for FHLs which can make these a popular option.

Qualifying as a Furnished Holiday Let (FHL): important conditions to meet

There are a number of conditions that landlords must meet to qualify as an FHL and secure tax advantages. The conditions to meet are:

  • The property must be available for letting for at least 210 days in the year; and
  • It must actually be let for at least 105 days in the year; and
  • It must not be let for periods of longer-term occupation (normally 31 days or more) for more than 155 days during the year. i.e., let out on a short-term basis.

Tax advantages of Furnished Holiday Lets (FHLs)

If a property qualifies as an FHL, what are the tax advantages?

  • Landlords of FHLs can claim capital allowances on fixtures and fittings purchased for use in the property resulting in higher tax deductions available than a standard residential let.
  • For standard rental property, mortgage interest relief is only available as a tax reducer of 20%. Under FHL rules, the full amount of mortgage interest can be deducted from the rental income.
  • Profits from an FHL are treated as earned income, which can give individuals the ability to put more into a pension tax efficiently.
  • When properties are sold, FHL can qualify for gift holdover relief which is not available on other residential let properties.

Additional considerations for FHLs in Scotland

If you have a residential property and are considering the best option to generate income, it is important to note that in Scotland, there are additional nontax-related rules around FHLs that you should be aware of too. Landlords of FHLs in Scotland must register their property with the local authority and apply for a license before taking any bookings. The UK Government have announced that similar plans will come into force in England later this year. Your local council should be able to help you with these rules.

Have a rental property and are not sure what the best option is?  Not sure what expenses you can claim against the income?  Do you want to know how much tax you would pay if you rent out a property? These, and many more, are all questions the private client team at Henderson Loggie deal with on a regular basis.

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