From a tax point of view, not all rentals are the same, and the rules for furnished vacation rentals are different from those for traditional buy-to-lets.
Buy-to-let
In a traditional buy-to-let, the same tenant or tenants live in the property for a long time. The standard length of a lease is at least six months.
Under the rules for property income tax, a landlord’s rental income from one or more “buy-to-let” properties is taxed as income.
All of the buy-to-let properties owned by the same person or people make up a single property income business, and taxes are paid on the business’s total profit. The landlord’s marginal tax rate is applied to the rental profit (or his or her share of the rental profit).
When making up the books, the cash basis is used by default when rental income is less than £150,000 per year. But if the landlord prefers, the accounts can be made using the accruals method instead.
Interest or financing costs that the landlord has to pay are not taken out of the rental profit. Instead, there is a tax break for 20% of the interest and financing costs (capped at the tax due on the rental profit, with any unrelieved finance costs being carried forward).
There are no capital allowances for furniture, fixtures, and fittings, but you can get a deduction for the cost of replacing home items.
As the business as a whole is evaluated for profits or losses, a loss on one property is automatically offset by a profit on another. When the business as a whole loses money, however, the loss can only be used to offset future profits from the same property income business.
Rental income from buy-to-let investments does not count as income for pensions or National Insurance purposes.
Furnished vacation rentals
On the other hand, furnished holiday lets have many short-term rentals to different guests. For tax purposes, a property must be rented out furnished, be available to rent for at least 210 days in the tax year, and be rented out for at least 105 days in the tax year. Lessons that last longer than 30 days are not counted, and neither are landlord stays.
Even though furnished vacation rentals are seen as an investment, they get tax breaks that buy-to-let landlords don’t get.
One of the biggest benefits is that landlords can deduct all of their interest and financing costs when figuring out how much money they made from their furnished holiday rental business. This gives them relief at their marginal tax rate. Capital gains tax reliefs, such as business asset sale relief and rollover relief, are also very helpful for landlords of furnished vacation rentals. If the landlord’s books are set up on the accruals basis, he or she can also claim capital allowances for furniture, equipment, and fixtures. For pension purposes, rental income also counts as earned income.
As with buy-to-let, the profit or loss for furnished holiday lettings is calculated for the business as a whole, not for each property. When a business has a net loss, this loss can be used to offset future profits from the same business.