More UK landlords are moving away from traditional buy-to-let and turning to serviced accommodation. The reasons are straightforward, higher rental income, better tax treatment, and more control over their property. But running serviced accommodation comes with specific tax obligations and management responsibilities that landlords need to understand before making the switch.
This guide covers everything you need to know from tax advantages and VAT rules to Making Tax Digital (MTD) compliance and day-to-day management.
KEY TAKEAWAYS
Serviced accommodation generates significantly more income than buy-to-let, typically 20–50% higher returns on the same property
FHL status removes the Section 24 disadvantage, landlords can fully deduct mortgage interest and claim capital allowances, unlike standard buy-to-let
VAT obligations depend on your turnover and business model, the right VAT scheme (Standard, Flat Rate, or TOMS) depends on your cost structure; the wrong choice costs money
The long stay rule for stays over 28 days can reduce the taxable value of the accommodation element, leading to a much lower effective VAT cost on longer stays if applied correctly
MTD for Income Tax is coming, SA landlords earning over £50,000 must submit digitally from April 2026; starting now avoids last-minute disruption
Professional management and the right software make SA scalable, a PMS, dynamic pricing tools, and MTD-compliant accounting software are not optional extras; they are the operational backbone of a well-run SA business
What Is Serviced Accommodation and Why Are Landlords Switching?
Serviced accommodation is a fully furnished property rented out on a short-term basis, from a few nights to several months. It sits between a hotel and a standard rental, as guests have the privacy of a home with amenities such as Wi Fi, a kitchen and regular cleaning.
Common guests include business travellers, contractors, relocating families and tourists. Because stays are short term and priced per night, serviced accommodation can often generate materially higher gross income than a traditional long term let on the same property, although the higher income is fully taxable and may also be subject to VAT once thresholds are exceeded.
Feature | Traditional Buy-to-Let | Serviced Accommodation |
|---|---|---|
Tenancy length | Fixed 6–12 month tenancy | Flexible nightly or weekly stays |
Income structrue | Fixed monthly rent under tenancy agreement | Nightly rates; income varies with occupancy and demand |
Tax Treatment | Subject to Section 24; mortgage interest not fully deductible for individuals | May qualify as FHL with full mortgage interest deduction and capital allowances (if criteria met) |
VAT Treatment | Residential rent is VAT-exempt | Standard-rated at 20% once turnover exceeds £90,000 |
Management Involvement | Lower involvement once tenant is in place | High involvement; guest turnover, cleaning, pricing management |
Landlords are switching mainly because of two reasons. First, the financial pressure created by Section 24 interest restrictions on buy to let. Second, the higher potential returns from a well-run serviced accommodation model.
How Does Serviced Accommodation Help Landlords Overcome Section 24?
Section 24 of the Finance Act 2015 restricted the deduction of finance costs for individual landlords with standard residential lets. Instead of deducting mortgage interest in full, landlords receive only a basic rate tax credit, which can leave higher rate taxpayers paying tax on more than their real profit.
Serviced accommodation can mitigate this through the Furnished Holiday Let (FHL) regime.
What FHL Status Gives You
When your serviced accommodation qualifies as an FHL, it is treated as a separate type of property business with many of the tax advantages usually associated with a trading business.
This changes your tax position considerably:
FHL Tax Advantages
Finance costs: FHL profits are outside the Section 24 restriction, so mortgage interest is deductible in full when calculating taxable profit for that year
Capital allowances: you can usually claim capital allowances on qualifying furniture, fixtures and equipment used in the FHL, such as beds, white goods and other plant, which is not available for standard residential lets
Business Asset Disposal Relief: Can potentially apply when you dispose of qualifying business assets, reducing CGT liability
Rollover Relief: Defer Capital Gains Tax by reinvesting in qualifying business assets where conditions are met
FHL Qualification Criteria
Your property must meet all of the following:
Available for let for at least 210 days per year
Located in the UK or European Economic Area (EEA)
Must be properly furnished, with sufficient furniture for normal occupation, and guests must have the right to use it
Let on a commercial basis with a genuine intention to make a profit
Actually, rented out for at least 105 days per year. You do not count lets to friends or family at reduced rates, or most longer lets of more than 31 days
The pattern of occupation must be suitable. Long lets of more than 31 continuous days must not exceed 155 days in total in the year, and those long lets do not normally count towards the 105 days test except in limited unforeseen circumstances
Missing any one of these criteria means your property does not qualify and you lose the associated tax benefits.
What Do Serviced Accommodation Landlords Need to Know About VAT?
VAT is one of the most important and most misunderstood tax areas for serviced accommodation operators. Here is what you need to know.
When You Must Register for VAT
If your business has taxable turnover above the VAT registration threshold, you must register with HMRC. The threshold has been £90,000 since April 2024. SA income is generally standard rated at 20% because it is treated in the same way as hotels and similar holiday accommodation.
The Flat Rate Scheme
The Flat Rate Scheme (FRS) simplifies VAT accounting. Instead of accounting separately for output and input VAT, you pay a fixed percentage of your VAT inclusive turnover, 10.5%.
A 1% discount applies in your first year of VAT registration so the rate can be 9.5% during that period.
Key points:
Under FRS you generally cannot reclaim input VAT on most day-to-day purchases. Only certain capital assets costing more than £2,000 including VAT may allow separate VAT recovery.
You must leave the scheme once turnover exceeds £230,000.
This scheme works particularly well for rent-to-rent SA operators, as their main cost (rent paid to landlords) is VAT-exempt, making the flat rate more financially beneficial.
The Tour Operators Margin Scheme (TOMS)
If your SA business packages or arranges additional services for guests such as transport or excursions, you may fall under TOMS. Under this scheme, VAT is calculated only on your profit margin, not on total revenue. It is complex but can produce significant VAT savings.
TOMS is one of the more complex areas of VAT law. Specialist advice is strongly recommended before applying this scheme to ensure it is being used correctly.
The 28-Day Rule
Under UK VAT rules, short-term accommodation is normally subject to VAT at 20%. However, where the same guest occupies the property for more than 28 consecutive days, special treatment applies.
Stay Duration | VAT Treatment | Effective VAT Rate |
|---|---|---|
Up to 28 days | Full charge standard-rated | 20% |
Day 29 onwards | Only 20% of charge is taxable | ~4% effective rate |
Practical VAT Tips
Keep separate records for short stays and long stays (28+ days)
Choose your VAT scheme carefully based on your cost structure
Consult a property tax specialist before registering, the wrong scheme can cost you money
What Is Making Tax Digital and How Does It Affect Serviced Accommodation Owners?
Making Tax Digital (MTD) is HMRC's programme to move all tax record-keeping and submissions to digital platforms. For SA landlords, the most relevant part is MTD for Income Tax Self Assessment (MTD for ITSA). It applies to landlords and sole traders whose combined annual business and property income exceeds specific thresholds. The mandate is being introduced in stages.
Who It Affects and When
What MTD Requires You to Do
Instead of one annual Self Assessment return, MTD requires:
Quarterly digital submissions of income and expenses to HMRC
Use of HMRC-recognised software for all record-keeping
A final declaration at year end
How SA Operators Should Prepare
MTD Preparation Checklist
Adopt HMRC-compliant accounting or property management software now
Record all bookings, income, and expenses digitally and in real time
Where your SA business also has VAT obligations, ensure your software handles both VAT returns and MTD submissions
Work with a property accountant experienced in SA, the quarterly reporting cycle leaves little room for errors
Starting digital record-keeping before the mandate deadline gives you time to correct habits and avoid penalties.
How Should You Manage a Serviced Accommodation Property?
Serviced accommodation is significantly more hands on than a standard buy to let. Guests change frequently, standards must stay high and pricing has to respond to demand in order to maximise income.
Self-Managing vs. Using a Management Company
Approach | What It Involves | Best For |
|---|---|---|
Self-manage | Full responsibility: listings, pricing, guests, cleaning, maintenance | Landlords with time and systems |
Management company | Hands-off — company handles everything for 15–20% of revenue | Landlords seeking passive income |
Dynamic Pricing
Nightly rates should not be fixed all year. Use dynamic pricing tools to adjust rates based on local demand, seasonal trends, and nearby events. This is one of the most effective ways to increase occupancy and maximise monthly income.
Listing on OTAs (Online Travel Agencies)
Listing on several online travel agencies such as Airbnb, Booking dot com, VRBO and Expedia allows you to reach different segments of the market and reduces reliance on a single platform.
Good photography, clear amenity information and well written descriptions that reflect how your target guests actually search for properties have a material impact on booking conversion rates.
Property Management Systems (PMS)
If you manage more than one property, a property management system is almost essential. A good PMS can:
Synchronise calendars across all platforms to avoid double bookings.
Automate guest messaging, check in instructions and review requests.
Integrate with your bookkeeping or accounting software so that income data flows directly into your digital records to support VAT and MTD compliance.
Maintenance and Standards
Hotel level cleaning between every stay is critical. It protects your reviews, which directly influence your occupancy and pricing power, and it protects the condition of the property.
Regular inspections, planned maintenance and timely upgrades of furniture and equipment help retain the value of the property and justify higher nightly rates. Over time, the consistency of your standards will show through in review scores and repeat bookings.
Conclusion
Serviced accommodation can offer stronger cash flow and more flexible tax treatment than standard buy-to-let, particularly where FHL status applies. However, VAT exposure, the 28-day rule and upcoming MTD obligations mean landlords must understand the compliance framework before scaling. The wrong structure or VAT choice can quickly reduce margins.
This model also demands active management. Income depends on pricing, occupancy and consistent guest standards, supported by reliable systems and accurate digital records. For landlords prepared to run it as a structured business rather than a passive investment, serviced accommodation can be both commercially and tax efficient.
Running a Serviced Accommodation? Keep Your Tax in Order
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