Owning a holiday let can be expensive, especially when it comes to keeping the place looking fresh, clean and modern. And then there’s the things that absolutely need paying, such as bills and repairs.

There are ways to reduce your tax bill though, so you can maximise those profits – which is always a win-win! In this blog, we’ll look at how you can be more tax-efficient when running a holiday let.

Should I set up a limited company, or be a sole trader as a holiday let landlord?

Like all decisions in life, this largely depends on your circumstances, and what you need to get out the business structure you choose. To give you a rough idea, we’ll go over the considerations to both.

Owning your holiday let as a sole trader

If you’re a sole trader, you are the business with no legal separation between you and it. You’ll need to declare all of your profits, and pay tax on them depending on which tax bracket your income falls into – even if you don’t actually take anything from the business.

This does mean your reporting and tax responsibilities are likely to be much simpler, but they might not be as efficient for higher earners. That lack of legal separation also means that any issues with the business become your issues too – including any debts!

Having a holiday let through your own limited company

A limited company on the other hand is a little different. While it’s a bit more complicated to set up, you can decide to keep your profits with the limited company, so you won’t pay income tax personally (although the company will pay Corporation Tax on its profits whatever you do).

This means that running a limited company can be more tax-efficient, because you can choose how to pay yourself from the business, or to simply reinvest the profits without paying personal tax on them.

 
Being legally separate to you as an individual also means that any debts or financial problems the company has won’t be passed on to you – although this does also mean that your company must own the property, not you. This might lead to other considerations if you ever decide to sell it, so it’s something to think about carefully!
 

Do I pay capital gains tax on my furnished holiday let?

Capital Gains Tax is a type of tax you pay on any profit you make disposing or selling an asset. Many landlords with furnished holiday lets qualified for Business Asset Disposal Relief (BADR) and so paid a reduced rate of just 10% on all gains on qualifying assets.

Unfortunately, BADR for qualifying Furnished Holiday Lets will be scrapped from 6th April 2025. This means FHL owners are subjected to the standard residential capital gains tax rates:
 

How do I claim expenses on my holiday let?

You claim expenses on your tax return. Once you’ve included them, they’ll be deducted from your income figures. Expenses are super important to claim, because they’re deducted from your profit – meaning you pay less in tax.

Expenses can be anything you use wholly and exclusively for your business. So don’t be afraid to declare any costs that could help minimise the tax you pay. You can claim for things such as:

• Any repairs / maintenance
• Marketing fees
• Utility bills
• Housekeeping
• Insurance

If you’re ever unsure about what you can claim, don’t just miss it off, speak with your accountant first!

Claiming tax relief on your mortgage or loans

Residential property owners can claim tax relief on any interest they incur on their mortgage, as well as any loans. This type of tax relief is capped at 20% though. The good news is if you’re an FHL landlord, this cap doesn’t apply to you until April 2025.

This means you’ll be able to claim the full amount of interest on your mortgage or any loans you have, until the FHL scheme is officially abolished – at which point you’ll be capped at 20% like everyone else!

Can I claim capital allowances on my holiday let?

Capital allowances are another type of tax relief for businesses. Claiming this means you’re able to deduct some, or in some instances all of an asset’s value from your profits before paying tax.

As a landlord, you can claim capital allowances just like you would expenses. You’ll be able to claim this tax deduction on eligible capital expenditure, for things like:

• Sofas, beds, curtains – or any other type of furniture or furnishing
• Any fixtures, for example a fitted bathroom or kitchen
• Other essential features for your holiday let such as heating and air conditioning

It’s important to note, capital allowances aren’t granted automatically, and you’ll claim them within your tax return. It’s also worth looking at what qualifies for capital allowances if you operate a camping or glamping business.

Don’t panic if you’ve fitted a bathroom or bought expensive furniture a while ago and haven’t claimed for it yet. While you may not be able to claim for full tax relief immediately on the purchase, you may still be able to claim writing down allowances, which spreads the tax relief over a number of years!

Can I split the profits of my holiday let with my spouse?

If you own a holiday let with your spouse, you don’t need to split the profits 50/50. In fact, you can split it however you like. So, if you earn considerably more than your spouse, and you know splitting the profits 50/50 would push you into a higher tax bracket, you can distribute it differently. Whether that be 60/40 or 80/20, it’s completely up to you and your partner.

Business rates on holiday lets

Because your furnished holiday let is seen as a business rather than a home, you won’t need to pay council tax. Instead, you’ll pay business rates. This (in most cases) is a significant reduction on your tax bill, as it’s much cheaper than council tax for the average sized property. Much more expensive if your holiday let is a mansion though!

You may be entitled to small business rates relief, which can result in you paying lower business rates, or better yet, being completely exempt from paying them. Whether you qualify for this depends on your property’s rateable value. You’re likely to be eligible for small business claims relief if it’s:

• Calculated to be less than £15,000
• Your only furnished let

 
Need advice on how to stay tax-efficient while running a holiday let? Talk to the team on 020 3355 4047, or get an instant quote today.