Tax status of accommodation businesses

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In terms of taxation, there is a fundamental difference between the way HM Revenue and Customs (HMRC) treats holiday accommodation and residential rental properties.

• Residential rental properties are treated as property investment businesses.
• Hotels, guesthouses and bed and breakfasts are treated as trading businesses.
• Self-catering accommodation can be treated as a trading business, provided that the conditions of the HS253 Furnished holiday lettings (2020) rules are met.

Having your self-catering property treated as a trading business carries the following advantages:

• It ensures that income, net of allowable expenses, is treated as earned income. This means that capital allowances can be claimed in respect of all furniture and equipment used in the business. This compares favourably with the treatment of residential rental properties, where losses can only be offset against future income, you cannot claim capital allowances in respect to any new furniture or equipment, and only part of the interest on mortgage payments can be off-set against income.
• Trading businesses are treated as a business asset for the purposes of determining Capital Gains Tax, which grants you far greater allowances than you receive for residential rental properties.
• For Inheritance Tax purposes, the property is also deemed to be a business asset and can be passed on tax-free.

Note: HMRC has successfully challenged the Inheritance Tax exemption of a self-catering property by arguing the level of service provided to guests was not sufficient for it to be deemed a trading business for the purposes of Inheritance Tax. You should therefore seek professional advice as to whether your property is exempt from Inheritance Tax.

In order for your self-catering property to qualify as a trading business, the following conditions must be met:

1. Commercial operation: the business must be carried on commercially, with a view to making a profit.
2. Pattern of occupation: total periods of longer-term occupation must not exceed 155 days (approximately five months) during the relevant period. A period of longer-term occupation is a letting to the same person for longer than 31 continuous days.
3. Availability: the property must be available for commercial letting as holiday accommodation to the public for at least 210 days (approximately seven months) during the relevant period.
4. Letting: the property must be commercially let as holiday accommodation to members of the public for at least 105 days during the relevant period. For the purposes of this condition, a letting for a period of longer-term occupation is not classed as a letting for holiday accommodation.

The reason for these conditions is to prevent people from trying to gain trade business status and the associated benefits, for either their home or their holiday home, when they have no intention of operating them as a commercially viable bed and breakfast or self-catering operation.

Note: if you operate a self-catering property, you are unable to claim sideways loss relief against other income. Also, regardless of complying with the FHL rules, HMRC may deem your self-catering property to be subject to Capital Gains Tax and Inheritance Tax, if it is determined that you do not provide a sufficient level of service to demonstrate that it is a trading business. It is therefore important to gain advice from an accountant who understands the taxation rules for self-catering businesses.