Owning a holiday let can be expensive, with ongoing costs like maintenance, utilities, and updates to keep the property fresh and appealing.
Fortunately, there are ways to make your holiday let business more tax-efficient and help you maximise profits. In this blog post, we’ll explore tax-saving strategies tailored for holiday let landlords, including choosing the right business structure, claiming allowable expenses, and understanding key tax rules.
Don’t have time? Here’s the wrap-up of this article in less time it takes to eat a taco 🌮
▪ Sole Trader vs. Limited Company: Sole traders have simpler reporting, but all profits are taxed under personal income. Limited companies can be more tax-efficient as they pay Corporation Tax and offer flexibility in how profits are used.
▪ Capital Gains Tax: From April 2025, furnished holiday lets will lose their 10% Business Asset Disposal Relief and switch to standard residential capital gains rates (18% or 24%).
▪ Claiming Expenses: Deduct repairs, marketing fees, utilities, and housekeeping costs from your profits to reduce your tax bill.
▪ Mortgage Interest Relief: You can claim full relief on mortgage interest until April 2025. After that, the cap is 20%.
▪ Capital Allowances: Until 2025, claim allowances on furniture and fixtures. After this, only replacements of domestic items will be eligible.
▪ Splitting Profits: If you co-own with your spouse, you can split profits however you like to optimise tax efficiency.
▪ Business Rates: Pay business rates (often cheaper than council tax) and check if you qualify for small business rates relief.
Skip right to…
- Save Tax On Holiday Lets… Deep Dive
- 1- Should You Set Up a Limited Company or Be a Sole Trader?
- 2- Owning Your Holiday Let as a Sole Trader
- 3- Operating Through a Limited Company
- 3- Is There Capital Gains Tax on My Furnished Holiday Let?
- 4- How to Claim Expenses on Your Holiday Let
- 5- Claiming Tax Relief on Your Mortgage or Loans
- 6- Can Capital Allowances on My Holiday Let?
- 7- Can the Profits of My Holiday Let with a Spouse?
- 8- What About Business Rates on Holiday Lets
- Conclusion – Maximise Your Holiday Let Profit
Save Tax On Holiday Lets… Deep Dive
1- Should You Set Up a Limited Company or Be a Sole Trader?
Your business structure can significantly impact your tax efficiency, so it’s essential to choose wisely.
There are two options:
1- Operating as a sole trader (under your own name). Read more about being a sole trader here!
2- Operating as a limited company (through a registered limited entity).
2- Owning Your Holiday Let as a Sole Trader
If you choose to operate as a sole trader, there’s no legal distinction between you and your business. All the profits from the holiday let must be declared on your Self Assessment tax return, and you’ll be taxed according to your personal income tax bracket, even if you don’t withdraw the profits for personal use.
Advantages:
▪ Simpler reporting and tax responsibilities.
▪ Potentially less complex than running a limited company.
Disadvantages:
▪ Less tax-efficient for higher earners, as income is taxed based on individual rates.
▪ Any debts or financial issues fall directly on you since there is no separation between personal and business liabilities.
3- Operating Through a Limited Company
Running your holiday let through a limited company introduces a layer of separation between you and your business. The profits belong to the company, not to you personally, which means the company will pay Corporation Tax on its earnings. You can then decide how to pay yourself from the company, either through dividends or salary, which can provide more tax flexibility.
Advantages:
▪ Potential for greater tax efficiency, as you can choose when and how to take income.
▪ Personal assets are protected since the company is a separate legal entity.
Ability to reinvest profits without immediately incurring personal tax.
Disadvantages:
▪ More complicated to set up and operate.
▪ The company must own the property, which can have implications if you decide to sell it in the future.
For a detailed look at the advantages and disadvantages of being a limited company click here.
3- Is There Capital Gains Tax on My Furnished Holiday Let?
Yes, but the rules are changing.
Until April 2025, landlords of furnished holiday lets can benefit from Business Asset Disposal Relief (BADR), paying a reduced rate of 10% on gains when disposing of the property. However, from 6th April 2025, this relief will no longer apply, and you will be subject to the standard residential capital gains tax rates:
| Tax Band | CGT Rate |
|---|---|
| Basic Rate Band | 18% |
| Higher Rate Band | 28% |
4- How to Claim Expenses on Your Holiday Let
Claiming expenses is crucial as they reduce your taxable profit, lowering your overall tax bill.
You can include these expenses in your tax return, allowing them to be deducted from your total income. Examples of allowable expenses include:
▪ Professional fees
▪ Repairs and maintenance
▪ Marketing fees
▪ Utility bills
▪ Housekeeping costs
▪ Insurance
Remember the HMRC expenses general rule: expenses must be ‘wholly and exclusively‘ for business purposes.
5- Claiming Tax Relief on Your Mortgage or Loans
Holiday let owners can currently claim tax relief on mortgage interest without the 20% cap that applies to other residential property owners. This full relief is available until April 2025, after which it will be capped at 20%, similar to other types of residential property.
So, if you have a mortgage or loan, now is the time to take full advantage of this tax relief.
6- Can Capital Allowances on My Holiday Let?
Drum roll please… Yes, furnished holiday let landlords can claim capital allowances on certain assets to reduce their taxable profits. Eligible capital expenditure includes:
▪ Furniture and furnishings (e.g., sofas, beds, curtains)
▪ Fixtures (e.g., fitted bathrooms, kitchens)
▪ Essential features like heating and air conditioning
Capital allowances can be claimed on your tax return, but they are not granted automatically. Even if you installed a new kitchen or bought furniture in previous years and haven’t claimed yet, you may still be able to use writing-down allowances to spread the tax relief over several years. However, from 6th April 2025, you will no longer be able to claim capital allowances for fixtures or furnishings. Instead, relief may be available for the replacement of domestic items.
7- Can the Profits of My Holiday Let with a Spouse?
Yes, you can split the profits with your spouse in any ratio you choose, which can be beneficial for tax purposes. Consistency and share-ownership are key here! And if you’re trading through a limited company that’s paying out dividends, this is based on the shareholding structure of the company.
For example, if splitting the profits 50/50 would push you into a higher tax bracket, you could allocate a larger percentage to your spouse if they have a lower income.
8- What About Business Rates on Holiday Lets
Since your furnished holiday let is considered a business, you won’t have to pay council tax. Instead, you’ll pay business rates, which are usually lower than council tax for most properties. Additionally, you might qualify for small business rates relief, depending on your property’s rateable value.
Usually you’re eligible if your property’s rateable value is:
▪ Less than £15,000
▪ Your only furnished let
This relief can result in lower business rates or complete exemption, further reducing your expenses.
Conclusion – Maximise Your Holiday Let Profit
Choosing the right business structure, claiming allowable expenses, and understanding the applicable tax rules are vital for tax efficiency in running a holiday let. Staying up-to-date with changes in tax law, such as the phasing out of BADR and changes to mortgage interest relief, can also help you adapt your strategy to minimise your tax burden.
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