The demand for rural self-catering holidays in recent years has presented an opportunity for farmers with cottages or barns suitable for conversion. Continued restrictions and uncertainty around foreign travel indicate healthy bookings for 2021, but what are the tax issues that arise from diversifying into holiday letting?
Business Rates and Council Tax
The fact that some holiday cottages pay Council Tax, whilst others are registered for business rates, had a significant impact during the pandemic. Those subject to business rates received a 100% discount for the year to March 2021 and were eligible for a £10,000 grant available to retail, hospitality and leisure businesses, and were vital when holiday lets were closed.
In recent years, businesses with a single holiday cottage have been able to claim Small Business Rates Relief, meaning many had no business rates to pay. Despite this, they were eligible for Covid support grants. By contrast, those paying Council Tax had to continue paying throughout the pandemic and received little or no assistance.
To be registered for business rates, a property owner must demonstrate that they are operating a commercial business. HMRC has recently indicated that they intend to clamp down on perceived abuses in this area by requiring evidence of actual letting, rather than merely declaring that the property is available for letting for at least 140 days per year.
Inheritance Tax
Unlike agricultural land and buildings, there is no relief from Inheritance Tax on the value of holiday cottages. This point has been argued in front of several tax tribunals in recent years, with HMRC successfully arguing that the typical holiday cottage is an investment activity rather than a trading business.
Only one taxpayer has been successful in obtaining relief, which was a business that offered a variety of services to guests far in excess of what cottage owners normally provide.
VAT
For VAT, HMRC argue the opposite by saying that holiday letting is the provision of services rather than the rent of property. The consequence is that if the holiday letting is undertaken by a VAT registered business, the income is subject to VAT. This has previously been at 20% but is currently charged at the reduced rate of 5% until 30 September, when it increases to 12.5%, before returning to 20% in April 2022.
Holiday letting is sometimes carried out separately from the main farming business, in a separate legal entity, meaning VAT does not have to be paid over on income and VAT on expenses cannot be reclaimed. HMRC does have the power to aggregate the two businesses if they are not kept totally separate, so care needs to be taken.
Income Tax and Holiday Letting
Income from holiday cottages is taxed separately to farming profits and is treated as property income. There are also several special rules applying to holiday letting:
These only apply if a property is available for letting for at least 30 weeks each year and is actually let for 15 weeks. However, there is a concession whereby a cottage continues to qualify even if not let for required weeks due to unforeseen circumstances. This will be useful as few, if any, cottages qualified last year because of the pandemic.
Losses from a holiday cottage cannot be offset against other income. Instead, they are carried forward and set against profits made from the same property.
Profits from holiday letting can be considered when determining the level of pension contributions that can be made.
The increasing demand for the staycation is certainly here for the near future and may be an attractive option for property owners, however, if you are considering diversifying your agricultural business into holiday letting, we would always encourage you to seek professional tax advice.
