Holiday Let Taxation Rules: Understanding Business Rates and Council Tax

If you own a holiday let in the UK, you might be confronted with the decision to tax it with council tax or business rates.

It might seem like a bureaucratic formality, but it can dramatically impact your property’s profitability and how you operate your holiday let.

Your choice affects your tax obligations, potential deductions, and how you run and manage your business. 

Read on to explore these options in detail. We’ll help you make an informed decision that could boost your bottom line and streamline your holiday let business.

Council Tax For Holiday Lets

Council tax is the local tax system used across England, Scotland, and Wales. 

Your property will be subject to Council Tax if:

1. 1. It does not qualify as a Furnished Holiday Let (FHL). To meet FHL criteria, the property must be available for short-term lets for at least 140 days a year and let for at least 70 days.
   2. It is not used for business purposes. If the property isn’t registered for business rates, such as for holiday lets or other commercial purposes, it will default to Council Tax.

In short, unless your property qualifies for business rates, it will be subject to Council Tax.

The amount of council tax you pay depends on your property’s valuation band. In England and Wales, this is typically based on the property’s value as of April 1, 1991. 

Yes, you read that right – 1991. This historical valuation can sometimes lead to quirks in the system, with newer properties being assessed based on what their value would have been at that time.

Council tax bands range from A to H in England and Scotland and A to I in Wales, with Band A being the lowest. The exact amount you’ll pay depends on your local authority, as each sets its own rates.

One key point to note is that many councils are introducing premiums on second homes and holiday lets. 

These can be substantial – some areas are considering premiums of up to 300% for properties that are purchased and left unoccupied for most, if not all, of the year. 

This is one of the main factors driving holiday let owners to consider business rates as an alternative.

Business Rates For Holidays Lets

Business rates are taxes levied on non-domestic properties in England and Wales. For holiday lets, they apply when your property is classed as non-domestic or operates as a business. This might be the case if you let out your holiday let as an AirBnb, for example. 

As of April 1, 2023, to qualify for business rates in England, your accommodation (which must be self-catering) must meet the furnished holiday let (FHL) criteria:

1. It’s been available for commercial letting for short periods totalling at least 140 nights in the last 12 months.
2. It will be available for commercial letting for short periods totalling at least 140 nights in the next 12 months.
3. It’s been let commercially for short periods totalling 70 nights or more in the last 12 months.

The criteria are different in Wales and Scotland. 

How Business Rates are Calculated

The business rate is calculated based on your property’s “rateable value” – an estimate of its open market rental value. 

The Valuation Office Agency (VOA) sets this value, which is then multiplied by a “multiplier” set by the government to determine your annual bill.

For example, for 2023-2024, the small business multiplier is 49.9 pence, and the standard multiplier is 51.2 pence.

Here’s an example of how the rate itself is calculated:

1. If a property’s rateable value is £10,000 and the small business multiplier is 49.9 pence, the business rates would be £10,000 x £0.499 = £4,990 per year.
2. If the rateable value is higher, say £15,000, using the standard multiplier of 51.2 pence, the calculation would be: £15,000 x £0.512 = £7,680 per year.

Why Business Rates Have Become More Appealing

The above business rates are generally higher than council tax.

So, why, in that case, would you opt to tax your let with the business rates system? There are several potential advantages:

1. Small Business Rate Relief (SBRR): This is the big one. If your property has a rateable value under £12,000, you could get 100% relief – meaning you pay nothing at all. Properties with a rateable value between £12,001 and £15,000 can get partial relief.
2. Avoiding Council Tax Premiums: As mentioned earlier, some local authorities are introducing hefty premiums on second homes. If you register your property as a business premises, you’ll pay business rates instead. 
3. Tax Efficiency: Business rates can be claimed as an expense against holiday let income, potentially reducing your overall tax liability.

More About Small Business Rate Relief (SBRR)

For properties with a rateable value under £12,000 in England, you are eligible for 100% SBRR, meaning no business rates are payable. This full relief is available to businesses that use only one property.

However, if your rateable value falls between £12,001 and £15,000, you can still get partial relief, which gradually tapers off. The relief decreases by approximately 1% for every £30 increase in rateable value beyond £12,000 until it reaches zero at £15,000.

The rules are slightly different in Scotland, Wales, and NI. The reliefs still apply if you have more than one property but are more complex.

The impact of these benefits is clear for those regularly letting their holiday properties, and people are recognising that. 

According to data from Hamptons estate agents, there were 78,000 holiday lets registered for business rates in England as of March 31, 2024. This marks a sizeable increase from 63,000 in 2020 – a growth of about 24% in just four years.

The Potential Drawbacks of Business Rates

While business rates can offer significant advantages, they’re not without potential downsides:

1. Stricter Letting Requirements: Meeting the minimum letting days can be challenging, especially in less popular areas or during off-peak seasons. If you fail to meet these requirements, you could find yourself liable for council tax instead.
2. Increased Administration: You’ll need to keep detailed records to prove you meet the business rates criteria. This includes evidence of your property being available for let and actually being let out.
3. Possible Higher Costs: If your property has a high rateable value and doesn’t qualify for relief, business rates could potentially be more expensive than council tax.
4. Volatility: Business rates can be more volatile than council tax, with the potential for significant changes when properties are revalued.

Making Your Decision: Factors to Consider

Choosing between council tax and business rates is certainly not a one-size-fits-all decision. 

Here are some key factors to consider:

1. Letting Patterns: Can you consistently meet the criteria for business rates? Look at your booking data from previous years and consider your plans for the future.
2. Property Value: What’s the likely rateable value of your property? This will determine whether you qualify for Small Business Rate Relief.
3. Local Council Policies: Are there any specific local policies that might affect your decision? Some areas have introduced additional requirements or restrictions for holiday lets.
4. Your Business Model: How do you operate your holiday let? If it’s a serious business venture, business rates might align better with your overall strategy.
5. Future Plans: Do you intend to increase or decrease your lettings in the future? This could affect your ability to meet the business rates criteria.
6. Financial Implications: Calculate the potential costs under both systems. Remember to factor in any available relief or potential council tax premiums.

The Importance of Professional Advice

Holiday let taxation can be challenging. The rules are complex and subject to change. 

What’s more, making the wrong choice could cost you money or even result in penalties from HMRC.

That’s where Double Point comes in. Our team of chartered accountants can help you with holiday let taxation. 

Contact Double Point today for expert guidance. We’ll help you make informed decisions that support the long-term success of your holiday let business.