Furnished Holiday Lets

Published on 9th July 2018

Owning a holiday let can be very advantageous. Not only does it provide enjoyable holidays for your family and friends, it provides a potentially lucrative additional income. In this article, we explain how your property can qualify as a Furnished Holiday Let (FHL) and explain the many tax benefits and advantages of owning and running a FHL.

Qualifying conditions for a furnished holiday let

There are certain criteria that must be met in order for property to be treated as a FHL for tax purposes rather than an investment property.

The property must be situated in the UK or elsewhere in the European Economic Area (EEA).

Where there are properties in the UK and the EEA, these must be treated as two separate property businesses.

This is important in the respect of losses.

A potentially obvious point, but there must be sufficient furniture provided within the FHL for normal occupation. This would include beds, soft furnishings, white goods, etc.

The business must be operated on a commercial basis with the view of making a profit.

In this context low season lettings would be considered commercial, as, whilst they may produce no profit, they do help towards the cost of maintaining the property. However, excessive lettings to friends or relatives at zero or nominal rents would not be considered commercial.

The FHL must also meet the three occupation requirements:

â–  Availability

The property must be available for commercial letting as holiday accommodation to the public for at least 210 days during the relevant period.

â–  Letting

The property must be commercially let as holiday accommodation to members of the public for at least 105 days during the relevant period. A letting to the same person for longer than 31 continuous days (a period of longer term occupation) is not a letting as holiday accommodation for the purposes of this condition; and

â–  Pattern of occupation

Total periods of longer term occupation must not exceed 155 days during the relevant period.

In most cases the availability threshold and pattern of occupation requirements will be met but more often the letting condition is not. This could happen for example if the weather has been poor, or you were forced to refurbish the FHL during the busy summer letting season.

If this is the case, do not despair as there are provisions within the legislation that means you may be able to make use of an averaging election or a period of grace election.

Averaging election

If you have more than one FHL property in the UK and one or more of these properties does not meet the letting condition, then an election can be made to average the rate of occupancy for all of the FHLs.

Period of grace election

As long as there was a genuine intention to let the FHL in the year and the letting condition was met in the previous year (even if this was met by the averaging election) then a period of grace election can be made to cover the current year and the following tax year. If, however, the letting condition for a FHL is not met in year three, the property will cease to qualify as a FHL.

Benefits for Income Tax

FHLs are entitled to claim capital allowances on purchases of new items such as furniture, white goods, soft furnishings, and plant and machinery such as radiators, toilets, lawnmowers, tools, etc. Whereas standard investment properties can only claim tax relief on replacement of items. This means that you can obtain tax relief on initially furnishing and kitting out the FHL, or if you are looking to upgrade the FHL to attract higher letting rates.

Profit derived from FHLs is, for tax purposes, treated as earned income. This is important if you wish to make pension contributions, because the amount that can be paid into your pension is dependent upon the level of your earned income.

For these purposes all UK based FHLs are treated as one business and any FHLs located in the EEA are treated as another.

Unlike with residential investment properties, there is no restriction on mortgage interest relief which can still be claim

Benefits for Capital Gains Tax

If you do decide to call it a day and sell your FHL there are very beneficial capital gains tax reliefs available.

Entrepreneurs relief

If the sale can be structured correctly, any gain on the disposal of the FHL will be chargeable to capital gains tax at 10% (subject to availability of lifetime limits) rather than 18%/28% rates that are due on sale of other residential properties.

Rollover relief

If all the proceeds received from the sale of a FHL are then used to purchase another “qualifying business asset”, such as another FHL property within the qualifying time period, then the capital gains tax due on the sale can be deferred. This means the tax will not then be payable until the disposal of the second FHL.

If some, but not all, of the proceeds are reinvested, then rollover relief is still available, but it will be restricted and some of the gain may still be chargeable.

In this case, Entrepreneurs relief may be available and can be claimed on the remaining gain.

Gift relief

Where the FHL is gifted rather than sold, under normal CGT rules this would create a capital gain for the individual giving the FHL away.

However, as an FHL qualifies as an asset used in a business, gift relief is available to defer the gain on disposal into the base cost of the FHL of the recipient. In other words, the relief transfers the gain from the donor to the recipient. This gain will then crystallise and become payable when the FHL is sold.

Partial relief is available where the property does not qualify as an FHL throughout ownership.

This is a very useful relief especially when considering the inheritance tax implications of FHL.

Inheritance tax

Historically, FHLs have qualified for Business Property Relief (BPR), which can provide 100% relief against inheritance tax where a business activity is deemed to be “wholly or mainly” trading.

However recent tax cases, specifically the “Ross case”, appear to have shut the door on FHLs qualifying for BPR and have set an onerous requirement for the level of ancillary services needed for FHLs to qualify as trading and hence be eligible for BPR.

As a result, it appears that in most cases BPR will not be available on FHL for inheritance tax purposes, and therefore to avoid a potential IHT bill, it is important to undertake estate tax planning.

Conclusion
If you are considering starting a FHL business and have questions regarding any aspect of this article, or you currently have a FHL business and you would like to discuss the tax implications then please do call us and make an appointment to see us.