Tax Advantages of Serviced Accommodation

If you’re a buy-to-let landlord, it’s possible you’ve spent the last few years watching your profits shrink. The announcement of Section 24 has meant landlords can no longer minus mortgage costs before calculating profit.

For all intents and purposes, this means private property investors are now taxed on turnover as opposed to profits.

It’s no wonder that many landlords are wondering whether there is a future in the BTL sector. For some investors, the fear is there is nothing they can do except sell up, and even then they could be hit by 28% capital gains tax.

However, there is another option.

Contrary to what many think, there is a way to stay in property and turn tax disadvantages into tax advantages. The answer is serviced accommodation.

How is Serviced Accommodation Different to BTL?

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Buy-to-let (BTL) may be the traditional model for investors but there is now a new kid in town. Serviced accommodation is rapidly growing in demand, thanks to more businesses and tourists realising it can provide greater value for less cost when compared to hotels.

While the only difference between a BTL and serviced accommodation may appear to be the length of the lease, they are actually completely different in every factor, from finance to tax.

Since serviced accommodation relies on a high-volume of short-term lets, managing one is closer to being a business owner than a landlord. A greater emphasis is placed on marketing your property, tracking the market and delighting your guests.

It makes sense then that, when it comes to tax, it is not treated the same way as a BTL, but what are the main tax advantages?

Well, there are a few but the first one that stands out is that Section 24 does not apply to Furnished Holiday Lets (FHL), meaning the major tax gripe BTL landlords have is eliminated.

Service Accommodation Guide

Wait, What’s a Furnished Holiday Let?

plane-flying-over-skyscraperServiced accommodation has an image of everyday people renting out the small flat they kept hold of in summer. In reality, though, much of serviced accommodation you see on sites like Airbnb is purpose bought to fulfil that role year round.

This is important because it means the property can be treated as a Furnished Holiday Let, so long as it meets the following qualifying criteria:

  • The property must be furnished;
  • It must be let on a commercial basis with a view to making profit;
  • It must be available to let for 210 days a year;
  • It must be let as a holiday let for 105 days.

For full time serviced accommodation, qualifying as an FHL is not complicated, meaning it can be taxed in a way closer to commercial property than residential.

We’ve already mentioned that becoming an FHL means you issues arising from Section 24 don’t apply to you, but there are some other major advantages.

Capital Allowances

FHLs can claim capital allowances on ‘items of the plant and machinery’ (eg. furniture) and fixtures in the property.

What this means is that all the money you spent on furnishings for your property can be deducted from your pre-tax profits. That means you can go the extra mile to make your property luxurious and increase your rental income without having to worry about being hit on the tax.

Pension Contributions

Serviced accommodation allows you to make more tax-friendly pension contributions, as the income generated from FHLs is classed as ‘relevant earnings’.

This is great because tax relief on pensions is typically limited to £3,600 per year, but 100% of relevant earnings can benefit. In short, this allows you to make larger tax-friendly contributions to your pension than you would be able to do on a traditional buy-to-let.

Reducing Capital Gains Tax

As we mentioned, managing an FHL is more like running a business than being a landlord, and this is backed up by the capital gains tax (CGT) advantages.

Ordinarily, if you were selling a buy-to-let property you would expect to pay 18% or 28% on any gains over £12,000. However, an FHL allows you to make use of a number of CGT reliefs, including:

  • Entrepreneur’s relief, which allows you to reduce the CGT rate to 10%, up to a lifetime limit of 10 million.
  • Roll-over relief, which allows CGT to be deferred and paid on a later sale.
  • Hold-over relief, which allows the property to be gifted to another and CGT to only be paid when this person sells the property.

How to Enjoy Tax-Free Rental Profits

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These are some of the ways serviced accommodation can provide exceptional tax advantages, but what does this look like in real life?

A correctly supported claim for capital allowances can see you generate years of tax-free rental profits. In fact, the average capital allowances fixtures claim on an FHL makes rental profits tax-free for as much as the first 2.25 years of operation.

Apply this to our latest investment opportunity, The Walton, and you could find that no tax is payable until year four of operation. If you financed the property yourself, this could stretch to 8 years, by which point you would have received £62k of rental profits with no tax being due.

Clearly, then, if you’re looking for tax-advantages in property, you should look no further than serviced accommodation.

Are There Any Disadvantages?

While the tax-advantages of serviced accommodation are undeniable, it’s also true that there are some potential disadvantages to be aware of. These include:

  • If your turnover exceeds the VAT registration threshold, you will need to charge VAT on the rents. This means either you’ll have to increase prices or absorb the cost yourself.
  • A loss incurred on an FHL business in a tax year is not available to be offset against other income or gains.
  • Most FHL businesses will not qualify for Business Property Relief (BPR), meaning the value of the FHL will be included within your estate for Inheritance Tax.

Conclusion

Property investors are used to having their profits chipped away as tax laws become more and more unforgiving. However, serviced accommodation offers a welcome opportunity for investors to benefit from tax-advantages for once.

While there are a few disadvantages to be aware of, they are far outweighed by the plus points of investing in serviced accommodation, including the immunity from Section 24, better capital allowances, and CGT relief.

Of course, there is more to serviced accommodation than just tax, which is why we’ve put together a dedicated eBook on the subject. Download Your Guide to Investing in Serviced Accommodation to learn more.Service Accommodation Guide